5.3 How are the competitors interacting?
Exhibit 5.1: McDonald’s and Burger King in an asymmetric interaction
5.4 How do we learn about our competitors?
5.5 What are the strengths and weaknesses of our competitors?
5.6 Market commonality and resource commonality
5.7 What are the objectives and strategies of our competitors?
5.8 What are the response patterns of our competitors?
Exhibit 5.2: Role play in CI as a predictor of competitive behaviour
5.9 Six steps to competitor analysis
5.10 How can we set up an organisation for competitor analysis and CI?
Exhibit 5.3: Counterintelligence done by Johnson Controls against Honeywell
5.11 Summary
Case study 5.1: Cereal Partners Worldwide (CPW): The no. 2 world player
is challenging the no. 1 – Kellogg
Questions for discussion
References

Each Part introduction lists the chapters and case studies within the part. It also includes a structure map that
allows you to get a clearer picture of how the part relates to the other sections in the book.
PART III VIDEo CASE STUDy

241

PART III VIDEO CASE STUDY
Nivea: segmentation of the sun-care market

Hamburg-based Beiersdorf AG can trace its origins back to a
patent received for medical plasters in 1882 by the pharmacist Paul C. Beiersdorf. The business did not remain focused
on this area alone: the first Labello lip-care stick was sold
almost 100 years ago. In 1911, Nivea Creme (which literally
means ‘snow white’) – the first stable, oil-and-water-based
cream – was created. From early on, the company was
looking abroad. Already by 1913 the company generated
42 per cent of its sales abroad.
The 1990s saw the start of Nivea’s systematic expansion
into an umbrella brand. Today, the process is regarded internationally as a classic example of successful brand development. Brand trust has been extended to a wide range of
products: men’s care, hair care, body care, face care, hand
care, sun protection, bath and shower care, deodorants and
make-up. Thanks to Nivea Sun, Beiersdorf is not just the
European market leader for sun-care products; it was also
the catalyst for the introduction of a sun protection factor
as a new global standard.
For a long time, Beiersdorf was active in four business
areas: cosmetics, toiletries, medicinal and pharmaceutical
products. Since the 1990s, Beiersdorf has focused consistently on the growing market of skin and beauty care – a
strategic decision that has now made Beiersdorf Germany’s
largest cosmetics company.
Today the company’s skin-care products are sold in more
than 100 countries.
Sales of the first full-spectrum range of men-care products for the mass market began in 1993. Today Nivea for
Men also has a strong position on the global market and is
consistently gaining market share.
The global market of cosmetics and toiletries totalled
€200 billion in 2008. In the same year, Beiersdorf had total
sales of nearly €6 billion, and €480 million in net income. The
company had 21,700 employees as of 31 December 2008.

Nivea sun care

Source: Courtesy of Beiersdorf AG.

a philosophy passed on for generations, and it reflects the
traditional criteria for beauty.

Source: Courtesy of Beiersdorf AG.

protection). Nivea Sun provides products that enable
people to be as safe as possible. Nivea Sun also encourages
the use of other forms of protection (e.g. wearing a sun hat
and avoiding midday sun). Protection is the largest segment
in the sun-care market.

2 After-sun
Providing cooling and refreshing effects for the skin after a
whole day in the sun.

3 Self-tan

The Nivea Sun brand portfolio has grown to over 40 products, which can be characterised in four different categories:

In contrast to protection and after-sun, the self-tan category
is concerned mostly with cosmetic appeal. Many adults use
self-tan to have an all-year-round sun-kissed glow.

1 Sun protection

4 Whitening products

It is vital that skin is adequately protected against the sun’s
harmful effects (although no sunscreen can provide total

The popularity of whitening products in Asia is based on
the old Asian belief that ‘white skin conceals facial defects’ –

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The choice of product depends on usage occasion (when) –
e.g. holiday, outdoor sports, gardening, working. This relates
to the Sun Protection Factor (SPF) required, e.g. the SPF
required for a holiday in Egypt differs greatly to outdoor work
in the UK. This is one of the reasons why Nivea Sun includes a
wide range of sun protection, from SPF 4 to 50+.
Sun protection is the primary benefit, but the preference by which this is delivered will vary by segment, e.g.
convenience is important to men (so they choose spray
applicators). Parents want to provide maximum protection
for children (high SPFs and coloured products are therefore
important).
Women are the main purchasers of sun care for the family.
This is reflected in above-the-line (advertising) communications, generally targeted towards a female audience.
Children are not purchasers of sun care. However, Nivea
Sun recognises it can play an important part in educating
children from a young age to be safer when in the sun.
In Asia, Nivea has considerable success with a combination of sun-care and whitening products in face care. While
there may be a market for bleaching products in these
zones, Nivea sticks to gentle formulas. In 2005, Nivea was
the world’s first brand to introduce whitening products for
men in Thailand.

Source: Courtesy of Beiersdorf AG.

04/07/14 3:33 PM

Following each part introduction, you will find a video case study from a leading international company. Read the
case study, watch the video, which is available on the companion website at www.pearsoned.co.uk/hollensen,and
then answer the questions.
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246

PART III DEVELoPING MARKETING STRATEGIES

7.1

introduction
A strategic approach to marketing has a number of advantages. First, a strategic emphasis
helps organisations orientate themselves towards key external factors such as consumers
and competition. Instead of just projecting past trends, the goal is to build market-driven
strategies that reflect customer concerns. Strategic plans also tend to anticipate changes in
the environment rather than just react to competition. Another reason strategic marketing is
important is that it forces you to take a long-term view.
The structure of this chapter will follow the phases in the corporate marketing planning
process.

Chapter 3

Development of the firm’s
competitive advantage
7.2

Corporate mission
A formal organisation exists to serve a purpose. This purpose may take a variety of forms and
may be classified in a number of ways according to the view points of a particular organisation.
A well-defined organisation provides a sense of direction to employees and helps guide
them towards the fulfilment of the firm’s potential. Managers should ask, ‘What is our business?’ and ‘What should it be?’ The idea is to extract a purpose from a consideration of the
firm’s history, resources, distinctive abilities and environmental constraints. A mission statement should specify the business domains in which the organisation plans to operate, or more
broadly – for example, ‘we are an office productivity company’. The firm should try to find a
purpose that fits its present needs and is neither too narrow nor too broad.
Determining a corporate mission that fulfils these requirements is by no means easy. Some
companies spend two or three years redefining their corporate mission and still manage to
produce a corporate mission statement that is not particularly useful or relevant. But what
precisely is the nature of such a statement?
To be useful and relevant, a business definition should ideally fulfil a number of criteria.
The following represents the more important of these criteria when thinking about how to
define a business:
The definition should be neither too broad nor too narrow. Definitions such as ‘we are in
the business of making profits’ or ‘we produce pens’ are not really useful. Effective mission
statements should cover product line definition, market scope and growth direction.
Ideally, the definition should encompass the three dimensions of what Abell (1980) refers to
as the ‘business domain’. These three dimensions are customer groups to be served, customer
needs to be served and technologies to be utilised.

SWOT (strengths, weaknesses, opportunities and threats) analysis is a technique designed
especially to help identify suitable marketing strategies for the company to follow.
A SWOT analysis encompasses both the internal and external environments of the firm.
Internally, the framework addresses a firm’s strengths and weaknesses on key dimensions
including: financial performance and resource; human resources; production facilities and
capacity; market share; customer perceptions of product quality, price and product availability;
and organisational communication. The assessment of the external environment includes
information on the market (customers and competition), economic conditions, social trends,
technology and government regulation. When performed correctly, a SWOT analysis can
drive the process of creating a sound marketing plan. SWOT analysis can be especially useful
in discovering strategic advantages that can be exploited in the firm’s marketing strategy.

Each chapter begins with a set of learning objectives that
will enable you to focus on what you should have achieved
by the end of the chapter.

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554

SWot analysis

define the concept ‘international competitiveness’ in a broader perspective from
a macro level to a micro level
discuss the basic sources of competitive advantages
explain how ‘economies of speed’ can be used as a competitive advantage
explain how Porter’s traditional competitive-based five forces can be extended
to a relationship (five sources) model
define the steps in competitive benchmarking and explain how these steps are
related to the outsourcing decision process
explain the purposes and motives for outsourcing activities
discuss the advantages and disadvantages of outsourcing

04/07/14 6:20 PM

Short chapter introductions concisely introduce the themes
and issues that are built upon within the chapter.

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PART V ORGANISING, IMPLEMENTING AND CONTROLLING THE MARKETING EFFORT

15.3

Building the marketing plan

Market potential
The upper limit of
industry demand. That
is, the expected sales
volume for all brands of a
particular product during
a given period.

Basically, the major functions of the marketing plan are to determine where the firm is, where
it wants to go, and how it can get there.
Marketing planning is linked to planning in other functional areas and to overall corporate strategy. It takes place within the larger strategic marketing management process of
the corporation. To survive and prosper, the business marketer must properly balance
the firm’s resources with the objectives and opportunities of the environment. Marketing
planning is a continuous process that involves the active participation of other functional
areas.
The marketing plan is responsive to both corporate and business unit strategy, and formally
describes all the components of the marketing strategy – markets to be served, products or
services to be marketed, price schedules, distribution methods and so on. The key components of the marketing planning process are situational analysis, marketing objectives and
goal, marketing strategies and programmes, budgets and implementation and control. Note
that the planning process format centres on clearly defined market segments, a thorough
assessment of internal and external problems and opportunities, specific goals and courses of
action. Business market intelligence, market potential and sales forecasting (see Appendix)
are fundamental in the planning process.
At a fundamental level, the marketing plan establishes specific objectives by market
segment, defines marketing strategy and actions required to accomplish these objectives
and pinpoints responsibility for the implementation of these programmes. Ultimately, the
marketing plan translates objectives and strategies into forecasts and budgets that provide a
basis for planning by other functional areas of the firm.
A good marketing plan requires a great deal of information gathered from many sources.
It is used to develop marketing strategy and tactics to reach a specific set of objectives and
goals. The process is not necessarily difficult, but it does require organisation, especially if
the marketer is not developing this plan by himself and is depending on others to assist or to
accomplish parts of the plan.
Every marketing plan should have a planned structure or outline before it is started. This
ensures that no important information is omitted and that the material is presented in a
logical manner. One outline to recommend is this:
1
2
3
4
5
6
7
8
9
10

ambush marketing An attack from a hidden position. It
occurs when a marketer works on connecting its product
with a particular event in the minds of potential customers, without having paid sponsorship expenses for the
event.
augmented reality A live view of a physical, real-world
environment whose elements are augmented (or supplemented) by computer-generated sensory input, such as
sound, video, graphics or gps data. AR technology allows
consumers to interact virtually with three-dimensional
product visualisations displayed on users’ screens.

adoption process The mental and behavioural stages
through which a consumer passes before making a purchase or placing an order. The stages are awareness, interest, evaluation, trial and adoption.

baby boom The major increase in the annual birth rate
following the Second World War and lasting until the early
1960s. The ‘baby boomers’, now moving into middle age,
are a prime target for marketers.

advertising Non-personal communication that is paid for
by an identified sponsor, and involves either mass communication via newspapers, magazines, radio, television and
other media (e.g. billboards, bus stop signage), or directto-consumer communication via direct mail.

below-the-line advertising Advertising that uses less
conventional methods, which are handled directly by
the company itself. It includes email campaigns towards
decision makers, promotions and brochures placed at
point of sale. It could also involve product demos and
sampling at busy places such as malls and shopping
centres.

advertising agency A marketing services firm that
assists companies in planning, preparing, implementing
and evaluating all or portions of their advertising
programmes.

AIDA Awareness, interest, desire, action – the stages
through which a consumer is believed to pass before purchasing a product.
allowance Promotional money paid by manufacturers to
retailers in return for an agreement to feature the manufacturer’s products in some way.

the business unit for which the plan was prepared;
the individual or group of individuals for whom the plan was developed;
the names and addresses of the individuals or agencies who authored the plan;

with suppliers, making them more suited to transaction
marketing.

above-the-line advertising Advertising in the mass
media, including press, radio, television and Internet. This
is normally handled by advertising agencies.

agent A marketing intermediary who does not take title
to the products but develops a marketing strategy and establishes contacts abroad.

The title page provides the reader with the following essential information:

●

4 Ps The basic elements of the marketing mix: product,
place (distribution), price and promotion; also called the
controllable variables of marketing, because they can be
controlled and manipulated by the marketer.

affordable approach Setting the promotion budget at
the level management thinks the company can afford.

title page

●

3-D printing An additive manufacturing process that
turns a computer-aided design (CAD) file, created on a
computer or with a 3-D scanner, into a physical object. 3-D
printing enables firms economically to build custom products in small quantities, which also allows firms profitably
to serve small market segments.

advertising objective A specific communication task to
be accomplished with a specific target audience during a
specific period of time.

However, there are other ways to organise a marketing plan that are equally good.
Let us examine each section of the marketing plan structure in further detail.

●

GLOSSARY

always-a-share customers Customers who have low
switching costs and do not value long-term relationships

benchmarking The process of comparing the company’s
products and processes to those of competitors or leading
firms in other industries to find ways to improve quality
and performance.
benefit segments Dividing the market into groups according to the different benefits that consumers seek from the
product.
big data Massive volume of data that is so large that it is
difficult to process using traditional database and software
techniques. Big data demands cost-effective, innovative
forms of information processing for providing enhanced
insights and better decision making.
blue oceans The unserved market, where competitors are
not yet structured and the market is relatively unknown.
Here it is about avoiding head-to-head competition. See
also red oceans.
bottom-up method A sales forecasting method that starts
with small-scale estimates (e.g. product estimates) and
works up to larger-scale ones. See also top-down method.

Key terms are highlighted in the text with a brief explanation in the margin where they first appear. These terms are also included in
the Glossary at the end of the book.
Z02_HOLL8851_03_SE_GLOS.indd 648

range of markets such as cleaning products, paper goods, cosmetics and food. Boutique enviropreneur marketing involved the marketing of innovative green products from a production
orientation. All efforts were focused on producing the most environmentally benign products,
rather than the products that consumers actually wanted. Thus, firms ended up with products
that were perceived as under-performing, or over-priced, or just too worthy and ‘unsexy’.
The average consumer would not understand that the reason their green detergents did not
get their clothes ‘whiter than white’ was that they lacked the optical brightener additives that
conventional detergents deposit on clothes (which hardly qualifies as ‘cleaning’ them). Similarly, they would not understand that green washing-up liquids would not produce a big fluffy
bowl of soap bubbles because they lacked polluting, cosmetic ingredients. So, the enviropreneur marketers may have meant well, but, while they had the right environmental goals,
they were always destined to have problems establishing a significant market presence in the
long term because they failed to successfully research, understand or educate their customers
(Peattie and Crane, 2005).

eXhibit 9.3
Unilever’s introduction of ‘Comfort One Rinse’ saves water
In India, more than 50 per cent of the population lives on less than 10 litres of water a day. Demand for water
resources will increase significantly as populations, economies and consumption rates grow. Estimates tell that by
2030, the supply of water in India will be half the demand for it.
Unilever’s Sustainable living Plan aims to change the domestic routines of millions of people in water-scarce countries to help reduce water use significantly by 2020, by providing 60 million households with laundry products that
deliver excellent cleaning but use less water.
As part of this plan, Unilever launched Comfort One Rinse in 2012 – a fabric conditioner that removes detergent
foam in just one rinse, saving 20 litres of water every wash. In the first round, Comfort One Rinse has been introduced
in India, Cambodia, Thailand, Vietnam, Indonesia and the Philippines. In the next round, other countries in Asia and
Africa will be included.
In 2012, One Rinse products were used in 1.4 billion washes in 28.7 million households worldwide.
Please also watch the following YouTube videos: www.youtube.com/watch?v=mAzyI_ndsdgwww.youtube.com/
watch?v=6qcl74Fghms

eXhibit 8.3
Björn Borg’s brand positioning and business modelling in the international
apparel market
Back in the mid to late 1970s, a tennis player from Sweden captivated the crowds at Wimbledon, winning five
straightsingles titles and nearly a sixth in 1981. His name was Björn Borg. Today Björn Borg AB, formerly Worldwide
Brand management AB, is a Sweden-based company active within the fashion industry. In December 2006, the Björn
Borg Group acquired the Björn Borg trademark and rights to the tennis legend’s name from Björn Borg for
US$18 million. Today Björn Borg himself has nothing to do with Björn Borg AB or its business activities. Björn Borg
AB is headquartered in Stockholm, Sweden.
The company’s operations comprise five product areas: clothes, footwear, bags, eyewear and fragrances.
A majority of the company’s sales are currently in the northern part of Europe, i.e. Sweden, The netherlands and,
to a lesser extent, norway and Denmark.
In 2012 the net sales of Björn Borg AB’s activities was €62 million (70 per cent of this was clothing – primarily
underwear), with total profits of €7.8 million (before taxes). Björn Borg AB has 139 employees in its company group
and is involved in the product areas of underwear, sportswear and footwear, as well as bags and luggage, eyewear and
fragrances. Björn Borg products are sold in around 20 markets, the biggest of which are Sweden and The netherlands.
Björn Borg today is a well-known brand in its established markets, thanks to consistent, long-term branding from
a clearly defined platform and focused marketing. The brand has an especially strong position in men’s underwear,
where Björn Borg is considered a market leader in terms of quality and design in its established markets.
Based on its established position in underwear (especially for men), Björn Borg is working actively to strengthen its
position in clothing, as well as in shoes and accessories. In its main product group, underwear, Björn Borg competes
with well-known international brands such as Calvin klein, Hugo Boss and Hom, in addition to local players. Competition is generally expected to grow as more major fashion brands such as Diesel and Puma introduce their own underwear collections and new companies enter the market.
Björn Borg’s business model utilises a network of product companies and distributors, which are either part of
the Group or independent companies and have been granted licences to one or more product areas or geographical
markets. The network also includes Björn Borg stores operated by the Group or as independent franchisees. By utilising

Source: Adapted from Baker (2012).

Source: Stockbyte/Getty Images (left), Unilever plc (right)

Source: Sergio Dionisio/Getty.

New and engaging exhibits analyse and discuss specific companies to show how the theories in the chapter are used by well known
brands in the business world.
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14

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7/22/14 2:54 PM

106

Chapter 1 InTRoDucTIon

Chapter 1:
Introduction
Internal (Part I):

External (Part II):

Chapter 2: Core
competences

Chapter 4:
Customer

Chapter 3: Competitive advantage

Chapter 5:
Competitor

part i ASSeSSING the COmPetItIVeNeSS OF the FIRm (INteRNAl)

In 2013 the new Super Mario Bros. U has been one of
the best-selling Wii U games. Also released in 2013 was the
popular LEGO City: Undercover. In this original leGO game,
exclusive to Wii U, players assume the role of Chase mcCain,
a tough police officer who is a master of disguise.
When the plans for Wii U were announced at the end
of 2011, the stock market was a bit disappointed. Investors
became more optimistic when they were told, at the beginning of 2013, that the global sales of the new console had
reached 3.5 million units by the end of December 2012. the
original Wii sold 3.1 million units over a similar period after
its release in November 2006. however, Figure 2 shows that
Wii U is still behind Nintendo’s two competitors, as was the
case in 2006, and the question now is whether Nintendo
can create another ‘blue ocean’. these concerns about

Chapter 1: Balancing a
traditional marketing
and an RM approach

Chapters 2–5: A more
traditional
marketing approach

Chapter 6:
The vertical
network

the Nintendo ‘Wii U’

Upstream

Source: Kevork Djansezian/Getty Images.

2

R&D

4
Competitors

RM = Relationship Marketing

Suppliers

Section 6.4

Production

Section 6.6

U GamePad is the main controller for the Wii U. It features a
built-in touchscreen, which can either supplement or replicate the game play shown on the main display. When using
the ‘Off tV Play’ function, the controller can act as a standalone screen without the use of a tV.
table 1 shows the worldwide sales of games consoles (in
millions units) from 2005 to 2012, together with the corresponding market shares, which are illustrated in (Figure 2).
the Wii U is available at two prices: basic (US$300 in
US) and deluxe ($350). At these prices Nintendo will make
a loss on selling the hardware, but from the moment the
consumer buys one piece of software, that entire customer
relationship becomes positive, in terms of profits for
Nintendo. the purpose of the business model is to drive
the installation base for the hardware, and then to drive a
strong tie-in ratio with all the software (games).

Figure 1.4 Balancing the concepts of transactional and relationship marketing

70
60
Market share (%)

customer requirements. The product is therefore the output of a process of collaboration that
creates the value customers want for each component of the product and associated services. Products are not bundles of tangible and intangible benefits that the company assembles
because it thinks this is what customers want to buy. Rather, products comprise an aggregation of individual benefits that customers have participated in selecting or designing. The
customer thus participates in the assembly of an unbundled series of components or modules
that together constitute the product or service. The product resulting from this collaboration
may be unique or highly tailored to the requirements of the customer, with much more of the
customer’s knowledge content incorporated into the product than was previously the case.

50
Sony PS3
Xbox 360
Wii + ‘U’

40
30
20
10
0

Price

2005

Traditional marketing sets a price for a product, perhaps discounting the price in accordance
with competitive and other marketplace considerations. The price seeks to secure a fair return
on the investment the company has made in its more or less static product.

2006

2007

2008
Year

2009

2010

2011

2012

Figure 2 Development of world market shares for SP3 (move), Xbox 360 (Kinect) and Wii (‘U’)
Source: Based on www.vgchartz.com.

Colour figures and photographs illustrate the key points and concepts and help clarify the topics discussed.

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GUIDED TOUR
Chapter 1 cASE STuDY

Seventh Avenue in new York and carnaby Street in London.
A new management team was also put in place.
one Hunter Wellington tall boot is made from 28 individual parts. Each part is individually tailored and assembled by hand to support specific parts of the foot, calf and
ankle. Hunters continue to be made and finished by hand
from natural rubber. Because of this degree of ‘handmade’
in the production of Hunter boots, the management moved
manufacturing from Scotland to china to cut production
cost. Retail prices were also increased by 20 per cent, and
modern ranges in a selection of colours and textures were
added.
A major breakthrough for Hunter in the realm of fashion,
as opposed to farms, came in 2006 when Kate Moss was
seen wearing an original pair in black at the Glastonbury
music festival. Since then, the Hunter boot has become a
familiar sight among celebrities, on catwalks and on high
streets, as well as in the countryside.
In September 2008, following the 2008 olympics in
Beijing, china, Hunter Boot Ltd sent specially made gold
Wellington boots to every member of the Great Britain
olympic team who had won a gold medal at the Games.
In 2010 the uK Prime Minister David cameron bought
pink and purple pairs of Hunter boots for his uS trip, as gifts
for Barack obama’s daughters.

The Hunter boot brand (www.hunter-boot.com) has
become a symbol of British country life and celebrity
fashion. Hunter boots, designed over 150 years ago, were
originally created to deal with Britain’s rugged and unpredictable weather. Today, Hunter is firmly established as a
fashion brand beloved by Hollywood celebrities.
Arthur Wellesley, the first Duke of Wellington, instructed
his shoemaker, Hoby of St James Street, London, to modify
his eighteenth-century boot. They designed the boots in
soft calfskin leather, removed the trim and made the cut
closer around the leg. It was hard to wear the new boots in
battle but it was said that the Duke of Wellington wore the
boots at the famous Battle of Waterloo in 1815. The boots
were dubbed ‘Wellingtons’ or ‘wellies’ and the name stuck.
Wellingtons quickly caught on with patriotic British
gentlemen eager to emulate their war hero. The original Wellington boots were made of leather; however, in
America, where there was more experimentation in shoemaking, producers were beginning to manufacture using
rubber. one such entrepreneur, Mr Henry Lee norris,
moved to Scotland in search of a suitable site to produce
rubber footwear. Eventually he found it on the farm of the
castle Mill in Edinburgh. norris began his boot-making
company, the north British Rubber company (the company
changed its name to the Hunter Rubber company in 2004),
in 1856. committed to fit, comfort, durability and performance Hunter Wellington boots bear two rare and coveted
stamps of approval of the British royal family.

Source: Jeffrey Blacker/Alamy Images.

Production of the Wellington boot was dramatically
boosted with the advent of World War I, due to the demand
for a sturdy boot suitable for the conditions in flooded
trenches. This made the wellies a functional necessity.
By the end of World War I, the north British Rubber
company had produced more than 1.8 million pairs of
boots for soldiers. Shoe production ran 24 hours a day.
Again the Wellington made an important contribution
during World War II. At the outbreak of war in September
1939, although trench warfare was not a feature, those
forces assigned the task of clearing Holland of the enemy
had to work in terrible flooded conditions. By the end of
the war, the Wellington had become popular among men,
women and children for wear in wet weather. The boot had
developed to become far roomier with a thick sole and
rounded toe. Also, with the rationing of shoes at that time,
labourers began to use them for daily work.
The company’s most famous welly, the original Green
Wellington, was made over 50 years ago in the winter of
1955. It was launched alongside the Royal Hunter – another
boot that remains in Hunter’s range today.
From 1966 to 2005 a number of ownership changes
took place, and in 2006, the Hunter Rubber company was
placed into administration as a result of cash flow problems.
In spite of a reported turnover of over £5 million, accountants from KPMG said the firm suffered from high manufacturing costs, including fuel costs, and made a loss from the
expansion of its business to the uS. Hunter reported a loss
of £600,000 from September 2003 to the end of
February 2005, when it had a net debt of £2.03
million.
In 2006, a private consortium led by Lord
Marland, Peter Mullen and Julian Taylor bought
Hunter out of administration and Hunter Boot
Ltd was born. After rapid restructuring of the
company, new supply routes and distribution
partners were found in the uK and the uS and
the Hunter portfolio was rationalizes to core
products exhibiting the key skills and tradition
of the company.
Hunter re-established itself as a major player
in the traditional country and leisure footwear
market in the uK in the aftermath of the 2006
acquisition and positioned itself as a strong
contender in the uS — opening showrooms on

19

Jimmy choo for a limited-edition black Wellington boot,
embossed with signature Jimmy choo crocodile print and
containing gold rivets and a leopard-print lining. Another
boot was then launched in 2011. The boots costs £250 and
were sold exclusively online at www.jimmychoo.com (the
original version normally costs around £80).
Jimmy choo and Hunter Boot Ltd received a tremendous
reaction from customers; the online waiting list opened on
1 May, and by 16 May more than 4,000 fashion-conscious
customers had already joined it. Today, the luxurious
Wellington boots have become a classic lifestyle item at
Jimmy choo and can be purchased regardless of the season,
and not only in traditional black, but in several variations.
In March 2012, J. Mendel and Hunter — two iconic brands
dating back to the nineteenth century — joined forces in a
special collaboration to produce the most glamorous of
Wellington boots: exclusive to north America, these limitededition boots brought together the sumptuous look and feel
of J. Mendel with the timeless functionality of Hunter Boot.
The boots went on sale in november 2012 and retail at from

Hunter Boot Ltd today
Since the downturn in 2006, Hunter has expanded its sales
and profits rapidly, as seen in (Table 1).
Hunter has since seen strong growth with international
distribution in 30 countries.

Hunter is moving into alliances with exclusive
fashion designers
In January 2009, Hunter announced that it would be
collaborating with London-based luxury fashion designer

A case study concludes each chapter, providing a range of material for seminars and private study, by illustrating real-life
applications and implications of the topics covered in the chapter. These also come with a set of questions to help you test
your understanding of the case.
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151
part i CASe StUDY

3-D printing has created a new generation of at-home and do-it-yourself manufacturers.
Microsoft has adapted its popular Kinect device (for its Xbox games console) to make 3-D
scanning easy and inexpensive. This can be used, for example, for scanning the human body
in order to get the right sizes and style in clothing.
On the macro level, 3-D printing has the potential to disrupt or destroy traditional models
of manufacturing, distribution, warehousing, shipping and retailing because products will be
made where they are needed. Future sales will be of designs, not products, and because 3-D
printing allows a product to be printed where it is needed, warehouses may be replaced with
digital inventories. Lower entry barriers will allow more local and small businesses to prosper.
Instead of relying on traditional manufacturing chains, people will design and print their own
products or have a local service bureau print it for them. 3-D printing enables firms to build
custom products economically in small quantities, which also allows firms to serve small
market segments profitably.
By reducing the need to ship physical products and efficiently using raw materials, 3-D
printing saves energy. By combining 3-D printing with the energy-saving efforts that most
countries are undertaking, jobs can be repatriated or kept at home.
3-D printing will eliminate some manufacturing jobs, but it should create others. New jobs,
coupled with diminishing cost savings of offshoring and outsourcing, give 3-D printing the
potential to foster a manufacturing come-back in countries with strong intellectual capital but
high manufacturing and labour costs.
However, when 3-D printing of complex structures, such as electronic devices, becomes
commonplace in the home, 3-D printing may place stress on the utility patent system in the
same manner that the digital revolution, the Internet and file sharing have placed stress on
the music industry and the copyright system. Products that are copyrightable, such as dolls,
action figures and figurines and toys, are especially vulnerable to 3-D printing at home. Toys
can be scanned and 3-D printed at home, and the designs can be shared peer-to-peer, thereby
threatening copyright and design patent protection for such products. Trademark owners may
also be affected when branded products are copied at home (Hordnick and Roland, 2013).

4.8

Nintendo’s Wii U arise at a time when smartphones and
tablet PCs are taking shares away from games consoles.

Questions for discussion
1 Which sources of competitive advantage are the most important?
2 How can analysis of national competitiveness explain the competitive advantage of a single

firm?

3 Is it possible to identify not only national competitiveness, but also regional competitive-

ness? (A region is here defined as more than one country.)

4 In which situations should a firm consider outsourcing its activities?
5 What are the advantages and disadvantages of outsourcing?

2 What are the competitive advantages of microsoft’s
Xbox Kinect and Sony’s PlayStation 3 move?

Consumers’ decision-making processes are classified largely on the basis of high and low
involvement with the product and the extensiveness of the search for information. Highinvolvement products or services are psychologically important to the consumer. To reduce the
psychological and financial risks associated with buying a high-involvement item, consumers
engage in a complex decision-making process. The five major steps in the process are problem
identification, information search, evaluation of alternatives, purchase and post-purchase evaluation. The way in which these steps are carried out differs between products and services.
Most purchase decisions have low consumer involvement. Therefore, consumers do not
engage in an extensive search for information or make a detailed evaluation of alternative
brands. Such search-and-evaluation behaviour is more likely to occur with products than
with services. Buying behaviour is strongly influenced by psychological and personal
characteristics that vary across individual consumers and countries. Information and social
pressures received from other people influence consumers’ wants, needs, evaluations and
preferences for various products and brand names.
By definition, organisational customers can be grouped into three main categories:

Chapter summaries reflect on what the chapter has
covered and will help you to consolidate your learning and
provide an important revision tool.

4 What do you think Nintendo’s chances are of creating a
new ‘blue ocean’ with Wii U?

QUESTIONS
1 What were microsoft’s motives in entering the games
console market with Xbox?

summary

M04_HOLL8851_03_SE_C04.indd 151

107

3 What are the competitive advantages of the original Wii
and the new Wii U?

Questions for discussion provide a useful assessment to
test your knowledge and encourage you to review and/or
critically discuss your understanding of the main topics
and issues covered in each chapter.

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An extensive list of references at the end of each chapter
directs you to other books, journal articles and websites,
which will help you develop your understanding and
inspire independent learning.

This page intentionally left blank

PREFACE

Relationship
marketing (RM)
The process of creating,
maintaining and
enhancing strong longterm relationships with
customers and other
stakeholders through
mutual exchange and
trust. RM seeks to build
a chain of relationships
between the firm and its
main stakeholders.
Transactional
marketing (TM)
The major focus of the
marketing programme
(the 4 Ps) is to make
customers buy.
Independence among
marketing actors (‘arm’s
length’) is considered vital
for marketing efficiency..
Marketing
management
The process of planning,
executing and controlling
marketing activities to
attain marketing goals
and objectives effectively
and efficiently.

The World Is Flat. This was the title of an international bestselling book by Thomas L. Friedman,
published in first edition in 2005. It analyses globalisation, primarily in the early twenty-first
century, and the picture has changed dramatically. The title is a metaphor for viewing the
world as a level playing field in terms of commerce, where all players and competitors have
an equal opportunity. We are entering a new phase of globalisation, in which there will be no
single geographic centre, no ultimate model for success, no sure-fire strategy for innovation
and growth. Companies from every part of the world will be competing with each other – for
customers, resources, talent and intellectual capital – in every corner of the world’s markets.
Products and services will flow from many locations to many destinations. Friedman mentions
that many companies in, for example, the Ukraine, India and China provide human-based
sub-supplies for multinational companies, from typists and call centres to accountants and
computer programmers. In this way these companies in emerging and developing countries
are becoming integral parts of complex global supply chains for large multinational companies
such as Dell, SAP, IBM and Microsoft.
As this new scene unfolds, the new global leaders increasingly will be forced to defend
the ground they thought they had won and secured long ago. And their expansion into new
markets will be challenged as never before. Their established processes and traditional business
philosophies will be turned upside down by challengers whose experiences in new emerging
markets cause them to see the world very differently and to do business in completely new
ways. Many executives of developed-country companies are not prepared to deal with the
massive wave of competition from skilled and determined new rivals.
As the world is becoming a flat playing field, there is also an increasing need in different
industry supply chains for creating relationships between the involved companies in the
industry value chains. This has important implications for the way that we look at the
marketing discipline in the individual firm. The consequence is that the development of
marketing theory and practice is undergoing a paradigm shift from a transactional to a
relationship orientation. As many companies are still relying on the traditional marketing
approach, this book will bridge the gap between relationship marketing (RM) and traditional
(transactional) marketing (TM).
In the traditional transactional approach, marketing management is about planning,
coordinating and controlling marketing activities that are aimed at satisfying customer needs
and desires – and receiving money from sales.
In recent years, marketing has been undergoing considerable self-examination and internal
debate. The overriding emphasis in the ‘traditional’ marketing approach is on acquiring as
many customers as possible. Evidence is mounting, however, that traditional marketing is
becoming too expensive and is less effective.
Many leading marketing academics and practitioners have concluded that a number of the
long-standing practices and operating modes in marketing need to be evaluated, and we need
to move towards a relationship approach that is based on repeated market transactions and
mutual gain for buyers and sellers.
The ‘new paradigm’ is commonly referred to as relationship marketing (RM). Relationship
marketing is not a new idea. Before the advent of mass production and mass media, relationship marketing was the norm; sellers usually had first-hand knowledge of buyers, and the
successful ones used this knowledge to help keep customers for life.

xxii

preface

Relationship marketing reflects a strategy and process that integrates customers, suppliers
and other partners into the company’s design, development, manufacturing and sales
processes.
Fundamentally, relationship marketing draws from traditional marketing principles.
Marketing can be defined as the process of identifying and satisfying customers’ needs in a
competitively superior manner in order to achieve the organisation’s objectives. Relationship
marketing builds on this.
The customer is still fundamental to a marketing relationship. Marketing exists to meet
efficiently the satisfaction of customer needs, as well as those of the marketing organisation.
There is a considerable body of knowledge in social sciences that sheds light on the many
facets of human relationships. We draw from these sources to further our understanding of
consumer relationships.
Marketing exchange seeks to achieve satisfaction for the consumer and the marketing
organisation (or company). In this latter group we include employees, shareholders and
managers. Other stakeholders (such as competitors, financial and governmental institutions)
are also important. As we shall see later, relationships can cover a wide range of organisations
in the environment, for example:
●
●
●
●

However, the main focus of this book is still on the relationships between the firm and its
closest external bodies, primarily the customers.
In the transactional approach, participants focus exclusively on the economic benefits of
the exchange. Even though in relational exchange the focus widens, economic benefits remain
important to all of the partners in marketing relationships.
With the relationship approach in mind, an integrated view of marketing management will be presented. To do this, the latest research findings in marketing management and related disciplines are summarised. Yet, marketing management is still a very
practical discipline. People still have practical needs, firms still face practical problems
and solutions still have to work in real life. Most marketers cannot and should not hide
in labs. Marketing is a social science based on theories and concepts, but it also requires
that most marketers meet with people, observe them, talk to them and understand their
activities. In essence, marketing is a dialogue between sellers (marketers) and buyers
(customers). This book reflects this applied approach. Together with important concepts
and theories, my experience that has been obtained through work for many years
with numerous companies – large and small, domestic and international – will be
drawn on.

Target audience
This book is written for people who want to know how the relationship and the traditional
marketing approach (in combination) affect the development of effective and efficient
marketing plans. This book is aimed primarily at students, MBA/graduate students and
advanced undergraduates who wish to go into business. It will provide the information,
perspectives and tools necessary to get the job done. My aim is to enable you to make better
marketing decisions.
A second audience for this book is the large group of practitioners who want to build
on the existing skills and knowledge already possessed. The book is of special interest to
the manager who wishes to keep abreast of the most recent developments in the ‘marketing
management’ field.

PREFACE

xxiii

Unique features of this book
This marketing text tries to integrate the ‘new’ relationship approach in the traditional process
of developing effective marketing plans. Compared to other marketing management books,
this text will attach more importance to the following themes.

Buyer–seller relationships
The guiding principle of this text is that of building relationships between buyers and sellers.
Relationships is a growing trend, and for good reason. Dramatic changes in the marketing
environment are presenting immense new opportunities for companies that really build and
retain relationships with customers. Relationship marketing emphasises the tremendous
importance of satisfied, loyal customers. Good customer relationships happen when all
employees within the organisation develop the sensitivity and desire to satisfy customers’
needs and wants. It may be argued that the traditional concept of marketing (as exemplified
later in Chapter 1) does not adequately reflect the recognition of the long-term value of a
customer. The argument is that many of the traditional definitions of marketing, although
stressing the importance of customer needs and satisfaction, are essentially concerned with
maximising the profitability of each transaction. Instead they should seek to develop longterm relationships with customers that cannot easily be duplicated by competitors.

Buyer–seller interaction on a global scale

Business-to-consumer
(B2C)
Marketing that involves
exchange relationships
between a firm and its
end customers, perhaps
via retailers.
Business-to-business
(B2B)
Marketing that involves
exchange relationships
between two or more
business customers and
suppliers.

Today’s companies are facing fierce and aggressive competition. Today, most firms compete
not only locally and nationally, but globally as well. Companies that have never given a thought
to internationalisation now also face competition in their home market from international
companies. Thinking globally also requires an understanding of the international diversity
in buying behaviour and the importance of cross-cultural differences in both the B2C and
B2B markets. This cross-cultural approach is centred on the study of the interaction between
buyers and sellers (and their companies), who have different national and/or cultural
backgrounds.

Creating competitive advantage through relationships with other companies
Greater emphasis is given to the development of competitive advantage, and consequently to
the development of resources and capabilities and competences within the organisation and
with other companies. Relationship marketing seeks to build a chain of relationships (networks
or value net) between the organisation and its main stakeholders, including customers,
suppliers, distribution channel intermediaries and firms producing complementary products
and services. Relationships to competitors are also considered.

Cross-functionalism
Cross-functional team
A team made up
of individuals from
various organisational
departments, who share a
common purpose.
Supply chain
management
How products are moved
from the producer to
the ultimate consumer,
with a view to achieving
the most effective and
efficient delivery system.

Marketing is not an isolated function. A marketer’s ability to implement effectively a
strategic marketing programme depends largely on the cooperation and competence of
other functional areas within the organisation. Consequently, substantial attention is given
to the interfunctional approach of marketing management. This includes: the concept of
competitive advantages, cross-functional teams in the development of new products, supply
chain management, internationalisation, quality management and ethics.

What is new in the third edition?
The main theme of this edition is how to build and retain B2B and B2C marketing relationships
in the value chain, both offline but increasingly also online. Consequently, an important
aspect of this edition is the strengthening of the online theme (social media, e-commerce,
etc.), which is now incorporated in all the chapters and in many cases and exhibits.

xxiv

PREFACE

The book’s chapters, cases and exhibits are totally updated with the latest journal articles
and company information. Besides that, the following new concepts are introduced in the
single chapters:
●

●
●
●
●

●

●

●

●

●

●

Chapter 2 – discusses four different strategies for closing the so-called ‘marketing
capability gap’. The starting point is two different dimensions: ‘Inside-out’ (resourcebased view) versus ‘Outside-in’ (market orientation view) and ‘Exploitation’ versus
‘Exploration’ Chapter 2 then analyses the way a company generates perceived value for
customers (value creation) and how it captures some of this value as profit (value capture).
In this chapter the concept of providing customer value through the product value chain
and the service value chain is now extended by adding ‘customer experiences’. The new
section (2.9 Experiential marketing) builds on the trends in the ‘experience economy’.
Chapter 3 – introduces the concept of ‘strategic groups’.
Chapter 4 – discusses 3-D printing as a potential new industrial revolution in customisation.
Chapter 9 – discusses different ways of segmenting the ‘green’ consumer market.
Chapter 10 – introduces the ‘consumer wheel’ (in the form of the Swedish Husqvarna case)
as a model for creating and retaining relationships with end-customers.
Chapter 11 – the service-dominant logic (S-D logic) is included as a supplement to the
traditional goods versus services considerations. Furthermore, crowdsourcing is discussed extensively as a measure for gaining access to new R&D resources among external
users.
Chapter 12 – discusses the total cost of ownership (TCO) from the customer perspective,
meaning all the lifetime costs that follow from owning the product over its entire lifetime,
including costs connected to disposal of the product. Furthermore, the ‘Freemium’ model
is introduced as a ‘loss leader’ concept, in which a marketer rapidly builds a customer base
when the marginal costs of adding customers and producing value for these are relatively
low.
Chapter 13 – smartphone marketing aspects in a distribution perspective are added, and
location-based app services – a niche of mobile marketing – are further explained and
implications for marketers are discussed.
Chapter 14 – now contains comprehensive discussions of the following ‘hot’ topics: Web
2.0, social media marketing and the ‘6C’ model. The transition of market communication
from ‘Bowling’ to ‘Pinball’ is also explained.
Chapter 16 – now contains a new section about social media metrics, both financial and
non-financial.
Appendix – introduces marketing research based on Web 2.0 (social media, such as
Facebook and Twitter).

structure and the marketing, planning and budgeting of Pink’s new album

Furthermore, several new exhibits have been added to the book.

Outline
The book is structured around the two main steps involved in marketing management –
that is, the decision-making process regarding formulating, implementing and controlling a
marketing plan:
●
●

Step 1: Analysis of the internal and external situation (Parts I and II)
Step 2: Planning and implementation of marketing activities (Parts III, IV and V).

The schematic outline of the book in the diagram on page [xxvi] shows how the two main
steps are divided into five parts. The book has a clear structure according to the marketing
planning process of the firm. Based on an analysis of the competitive advantages of the
firm (Part I) and the analysis of the external situation (Part II), the firm is able to develop
marketing strategies (Part III) and marketing programmes (Part IV). Finally, the firm has
to implement and control its activity in the market and, if necessary, make changes in the
marketing strategy (Part V). Throughout the book this marketing planning process is seen in
a relationship approach, as a supplement to the transactional approach.
The market research function gives a very important input to all five phases (parts) of
this decision-making process, with a possible feedback to the marketing information system
(MIS). Therefore, this section of the book is an Appendix, but a very important one, as the
past marketing experiences are stored in the marketing information system, which may add
important contributions to new marketing decision-making processes – i.e., for making
better marketing decisions.

Pedagogical/learning aids
Many aids to student learning come with the book. These include:
●

●

●

●
●
●

●

●

Chapter learning objectives: these tell the reader what he/she should be able to do after
completing each chapter.
Case studies: there is a case study at the end of each chapter and each case study contains
questions.
Video case studies: each part starts with a video case study, which can be accessed on the
book’s website (www.pearsoned.co.uk/hollensen).
Exhibits: these examples from the real world illustrate the text and the marketing models.
Summaries: each chapter ends with a summary of the main concepts.
Discussion questions: at the end of each chapter the discussion issues are presented as
questions.
Marginal definitions: key concepts from the glossary are defined in the margins of the
text.
Glossary: a glossary on page [648] provides a quick reference to the key terms in the
book.

Supplementary material to accompany the book can be downloaded by lecturers from www.
pearsoned.co.uk/hollensen.
Tables 1 and 2 show the video case studies and the chapter case studies in this book.

xxvi

PREFACE

Chapter 1: Introduction

Assessing the current situation:
Part I: Assessing the competitiveness of
the firm (internal)
Chapter 2: Identification of the firm’s core
competences
Chapter 3: Development of the firm’s competitive
advantage

15.1 Triumph
How to manoeuvre as a modern brand in the global
underwear market

Switzerland/
Germany

World/Western
Europe/USA
B2C/B2B

16 Budgeting and controlling

16.1 Sony Music Entertainment New worldwide
organisational structure and the marketing, planning
and budgeting of Pink’s new album

USA, Japan

World B2C/B2B

ABOUT THE AUTHOR

Svend Hollensen is an Associate Professor of International
Marketing at the University of Southern Denmark (Department
of Border Region Studies) and also a visiting professor at
London Metropolitan University. He holds an MSc (Business
Administration) from Aarhus Business School. He has practical
experience from a job as International Marketing Coordinator
in a large Danish multinational enterprise, as well as from being
International Marketing Manager in a company producing
agricultural machinery.
After working in industry, Svend received his PhD in 1992
from Copenhagen Business School. He has published articles
in journals and is the author of several marketing textbooks.
Among others he is the author of Global Marketing, published
by Financial Times-Prentice Hall and now in its sixth edition
(2014). Indian, Spanish and Dutch editions have been developed
together with co-authors, and it has been translated into Russian
and Chinese.
He may be contacted via:
University of Southern Denmark
Department of Border Region Studies
Alsion 2
DK-6400 SĂ¸nderborg
Denmark
e-mail: svend@sam.sdu.dk

AUTHOR’S
ACKNOWLEDGEMENTS
The successful completion of this book depended on the support and generosity of many
people.
I wish to thank the many academics whose articles, books and other materials I have cited
or quoted. It is not possible here to acknowledge everyone by name, but I thank you for
all your help and contributions. I am particularly indebted to the following individuals and
organisations.
University of Southern Denmark
●
●
●

●

Management: the best possible environment for writing and completing this project.
Colleagues: for encouragement and support during the writing process.
Janne Øe Hobson and Charlotte Lund Hansen: who took care of the word processing of my
drafts in a highly efficient manner.
The library team: who provided articles and books from sources worldwide.

In the development of this text a number of reviewers have been involved whom I would like
to thank for their important and valuable contributions.
I am grateful to my publisher Pearson Education. During the writing process I had the
pleasure of working with a team of editors, whom I thank for their encouragement and professionalism in transforming the manuscript into the final book. Especially, I would like to thank
Developing Editor Eileen Srebernik, Publisher Catharine Steers and Editor-in-Chief Rachel
Gear for their encouraging comments during the whole process.
Throughout the writing period there has only been one constant in my life – my family.
Without them, none of this would have been possible. Thus it is to my three girls – my wife,
Jonna, and my two daughters, Nanna and Julie – that I dedicate this book.
Svend Hollensen
Sønderborg, Denmark
July 2014

PUBLISHER’S
ACKNOWLEDGEMENTS
We are grateful to the following for permission to reproduce copyright material:

Learning objectives
After studying this chapter you should be able to:
describe how marketing management is placed in the overall company strategy
compare and discuss the differences and similarities between the traditional
(transactional) marketing approach and the relationship marketing approach
● explain what implications the relationship marketing approach has on the
traditional (transactional) marketing mix (the four Ps)
●
●

2

CHAPTER 1 introduction

1.1

Introduction

Transactional marketing
(TM)
The major focus of the
marketing programme
(the 4 Ps) is to make
customers buy.
Independence among
marketing actors (‘arm’s
length’) is considered vital
for marketing efficiency.
Relationship marketing
(RM)
The process of creating,
maintaining and
enhancing strong longterm relationships with
customers and other
stakeholders through
mutual exchange and
trust. RM seeks to build
a chain of relationships
between the firm and its
main stakeholders.

1.2

Recent years have seen a decline in the effectiveness of traditional marketing tools (such as mass
media advertising) with customers, who are bombarded with thousands of marketing messages
every day and actively seek ways to avoid such messages. A dramatic shift in the way customers
communicate with each other has arisen. The marketing culture is moving towards a more interactive dialogue, where both the firm and the customers are actively being involved in the exchange
of information. Such a two-way communication approach is necessary where both entities are in
regular contact with one another and the quality of these communications is high. This transformation from the traditional marketing to focusing on building and improving high-quality
relationships can lead to a number of desirable marketing outcomes (Clark and Melancon, 2013).
This chapter introduces marketing management in a relationship approach. The chapter
contrasts the traditional (transactional) marketing (TM) concept with the relationship
marketing (RM) approach. The marketing management process is introduced in the form of
a hierarchical planning model.
This book will bridge the gap between the traditional marketing (TM) planning approach
and the ‘new’ relational marketing (RM) approach.
This chapter will start by discussing where the marketing management strategy is placed in
the overall company strategy. The book is structured according to the hierarchical marketing
management process Figure 1.1.

The marketing management process

Marketing plan
A marketing plan is a
written document that
details the necessary
actions to achieve the
company’s marketing
objectives. It can be for
a product or service, a
brand or a product line.
Basically, a marketing plan
describes the marketing
activities of a company
in order to produce sales
at the customer level.
Marketing plans cover
between one and five
years. A marketing plan
may be part of an overall
business plan.

Though it is not always the case, the starting point for the marketing management process and
the marketing plan should be the corporate strategy.

Marketing strategy
Although marketing ‘strategy’ first became a popular business buzzword during the 1960s, it
continues to be the subject of widely differing definitions and interpretations. The following
definition, however, captures the essence of the term:
A marketing strategy is a fundamental pattern of present and planned objectives, resource
deployments and interactions of an organisation with markets, competitors and other environmental factors.

This definition suggests that a strategy should specify what (objectives to be accomplished),
where (on which industries and product markets to focus) and how (which resources and
activities to allocate to each product/market to meet environmental opportunities and threats)
in order to gain a competitive advantage.
Rather than a single comprehensive strategy, many organisations have a hierarchy of interrelated strategies, each formulated at a different level of the firm. The three major levels of
strategy in most large, multi-product organisations are:
1 corporate strategy
2 business-level strategy
3 functional strategies, e.g. marketing strategy.

Figure 1.1 Structure of the book in relation to the hierarchical marketing management process
Mission
The purpose of the
company. It is what
the company wants to
do for its customers.
The mission statement
should answer who
the customers are and
what value (products
and services) should
be provided to the
customers.
Objective
A desired result at some
future point in time.
Objective should be
specific, measurable,
attainable, realistic and
time-specific (SMART).

In small, single-product companies, corporate and business-level strategic issues merge.
Our primary focus is on the development of marketing strategies and programmes for
individual product-market entries, but other functional departments – such as R&D and
production – also have strategies and plans for each of the firm’s product markets. Table 1.1
summarises the specific focus and issues dealt with at each strategy level.
The traditional strategy literature operates with a hierarchical definition of strategic
marketing management. The terms mission and objectives have specific meanings in this
hierarchical definition of strategy and strategic management.

Mission and vision
The corporate mission can be considered as a brief statement of the purpose of the company –
what the organisation is and what it does (‘Who are we?’).

4

CHAPTER 1 introduction

Table 1.1 Different planning levels in the company

Diversification
The market and product
development strategy
that involves expansion
to a relatively large
number of markets and
products.
Line extension
Using a successful brand
name to introduce
additional items in a
given product category
under the same brand
name, such as new
flavours, forms, colours,
added ingredients or
package sizes.

Strategy
components

Corporate strategy

Business strategy

Scope/
mission

Corporate domain – which
businesses should we be in?

Business domain –
which product markets
should we be in within
this business or
industry?

Allocation across
components of the marketing plan (elements of
the marketing mix) for a
specific product-market
entry

Sources of
competitive
advantage

Primarily through superior
corporate financial or human resources; more corporate R&D; better organisational processes or synergies
relative to competitors
across all industries in which
the firm operates

Primarily through
competitive strategy;
business unit’s
competences relative
to competitors in its
industry

Primarily through effective product positioning;
superiority on one or
more components of the
marketing mix relative
to competitors within a
specific product market

Sources of
synergy

Shared resources,
technologies, or functional
competences across
businesses within the firm

The mission of Coca-Cola is:
Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions.
●
●
●

To refresh the world . . .
To inspire moments of optimism and happiness . . .
To create value and make a difference.
Source: www.thecoca-colacompany.com

Vision
What the company
wants to become, i.e.
the description of the
company’s desired future
state.

The mission statement may change if the company outlives the industry it started in, but
it should still tie back to the core values. For example: ‘Google’s mission is to organize the
world’s information and make it universally accessible and useful.’
Ideally, the definition could cover Abell’s three dimensions for defining the business: customer
groups to be served, customer needs to be served and technologies to be utilised (Abell, 1980).
A vision statement is what the enterprise wants to become (‘Where do we wish to go?’). The
vision is a description of the company’s ‘desired future state’. Thus, the company may create a
vision statement describing the organisation as it may be in, say, ten or more years. Note the
emphasis on the future; the vision statement is not true today. Rather, it describes the organisation as it could become – in the future.
A vision statement should build enthusiasm. It should provoke inspiration. It should stimulate people to care. It should ‘rally the troops to action’. That is what President Kennedy
accomplished with the vision statement he offered in early 1961. Kennedy said:
I believe that this nation should commit itself to achieving the goal, before this decade is out,
of landing a man on the moon, and returning him safely to earth.

The vision of Coca-Cola is:
Our vision serves as the framework for our Roadmap and guides every aspect of our business by
describing what we need to accomplish in order to continue achieving sustainable, quality growth.
●
●

●

●

●

●

People: Be a great place to work where people are inspired to be the best they can be.
Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and
satisfy people’s desires and needs.
Partners: Nurture a winning network of customers and suppliers, together we create
mutual, enduring value.
Planet: Be a responsible citizen that makes a difference by helping build and support
sustainable communities.
Profit: Maximize long-term return to shareowners while being mindful of our overall
responsibilities.
Productivity: Be a highly effective, lean and fast-moving organization.
Source: www.thecoca-colacompany.com

McDonald’s combine their mission with a vision statement:
Our vision is to be the world’s best ‘quick service restaurant’. This means opening and running
great restaurants and providing exceptional quality, service, cleanliness and value.
Source: www.mcdonalds.com.

6

CHAPTER 1 introduction

Objectives
Objectives in the hierarchical definition of strategy are the specific performance targets that
firms aspire to in each of the areas included in a firm’s mission statement. It is usually not
enough for a firm just to assert that it wants to be a leader in its industry or that it wants to
become a major diversified company. In addition, a firm needs to specify what it means to be
a leader in its industry or what being a major diversified company means. Often, objectives
are stated in financial or economic terms. Thus, for one firm being a ‘leader’ in an industry
may mean having the largest market share, but for other firms leadership might mean being
the most profitable firm in the industry, having the highest-quality products, or being the
most innovative. In the same way, being a major diversified company may mean unrelated
diversification across a wide variety of industries for one firm and a relatively narrow product
and industry focus for another. In this hierarchical definition of strategy, comparing actual
behaviour with objectives is the way that managers can know whether they have fulfilled a
firm’s mission.
With a mission and objectives in place, a firm (according to the hierarchical definition of
strategy) can then turn its attention to strategies. Strategies, here illustrated by the marketing
strategy, thus become the means through which firms accomplish their objectives and mission.

Marketing plan
In most organisations, strategic planning is an annual process, typically covering just the year
ahead. Occasionally, a few organisations may look at a practical plan that stretches three or
more years ahead. To be most effective, the plan must be formalised, usually in written form,
as an identifiable marketing plan. The process of marketing management and the development of a marketing plan is no different from any other functional area of management in that
it essentially comprises four key tasks.

Analysis

Marketing information
system (MIS)
A system in which
marketing information is
formally gathered, stored,
analysed and distributed
to managers in accord
with their informational
needs on a regular,
planned basis.
Big Data
The vast collection of
data from traditional and
digital sources (inside and
outside the company)
that represents a source
for ongoing discovery
and analysis. It demands
cost-effective forms of
information processing
for enhanced insight and
decision making.

The starting point of marketing management decisions is analysis. Customers, competitors,
trends and changes in the environment and internal strengths and weaknesses must each
be fully understood by the marketer before effective marketing plans can be established.
Analysis, in turn, requires information using systematic market research and a marketing
information system (MIS).
The volume of digital data accessible for the marketer is now growing at an exponential
rate. The use of Big Data – large pools of data that can be brought together and analysed to
discern patterns and make better decisions – will become the basis of competition and growth
for individual companies (McAfee and Brynjolfsson, 2012).
For example, manufacturers can analyse incoming data and, in some cases, automatically
repair software damage. In the retailing sector it will be possible to track the behaviour of
individual customers from Internet click streams, update the customers’ preferences and model
their likely behaviour in real time. When the customers are then nearing the purchase decision
regarding a specific product in the store, the retailer may automatically offer a bundle of products (cross-selling), together with reward programme benefits. Another example is McDonald’s,
which has equipped some stores with devices that gather operational data as they track customer
interactions, traffic in stores and ordering patterns. Researchers can model the impact of variations in menus, restaurants designs and training, among other things, on sales and profitability.

Planning
The second task of the manager is the planning process. The marketing manager must plan
both long-term marketing direction for the organisation (strategic planning), including, for
example, the selection of target markets, and the marketing programmes and tactics that will
be used to support these strategic plans.

CHAPTER 1 introduction

7

Implementation
Both strategic and tactical plans must, of course, be acted upon if they are to have any effect.
The implementation tasks of marketing management involve such activities as staffing, allocating tasks and responsibilities, budgeting and securing any financial and other resources
needed to carry out the plans. Actions include activities such as placing an advert in the right
media, delivering products, carrying out customer surveys and so on.

Control
Control
The process by which
managers ensure that
planned activities are
completely and properly
executed.
Effectiveness
Doing the right
thing – making the
correct strategic choice.
Marketing audit
An analysis and
evaluation of the internal
and external marketing
environment of the
company.

The fourth, and sometimes neglected, task of the manager is measuring and evaluating
progress against objectives and targets established in plans. Control of marketing plans can
be problematical, with difficulties associated with both measuring marketing performance
and pinpointing cause and effect. For example, market share – a frequently used measure of
marketing performance and hence a basis for marketing control – needs very careful analysis and interpretation if it is to provide a useful basis for controlling the effectiveness of
marketing strategies and plans. Both qualitative and quantitative techniques of control should
be used by the marketing manager and include budgetary control, control of marketing mix
effectiveness and, from time to time, a full marketing audit.
In the following section the strengths and weaknesses of the hierarchical approach to
marketing planning will be highlighted.

Strengths of the hierarchical approach to marketing planning
The hierarchical approach has three important strengths. First, it emphasises the link between
strategy and performance. Virtually all strategic management researchers, and most practising managers, are interested in the relationship between the actions taken by a firm and
a firm’s performance. The hierarchical definition provides explicit criteria for judging the
performance quality of a firm’s strategies – good strategies enable an organisation to reach
its objectives and fulfil its mission; bad strategies make it more difficult for a firm to reach its
objectives and fulfil its mission.
Second, this hierarchical definition focuses on the multiple levels of analysis that are
important in formulating and implementing strategies. These levels of analysis vary in their
degree of abstraction. Company missions are very abstract concepts. They specify what a firm
wants to become but say little about how a firm will get to where it wants to go. Objectives
translate missions into specific goals and targets and thus are less abstract. Strategies specify
which actions firms will take to meet their objectives. Plans (the least abstract concept) focus
on specific actions that need to be taken to implement strategies.
By emphasising the multiple levels of analysis in the strategic management process, hierarchical definitions appropriately emphasise the need in organisations to gather information,
ideas and suggestions from all parts of the firm in order to formulate effective strategies.
In this conception of strategy, each part of a firm plays an important role. Senior managers
specialise in establishing missions and objectives, divisional managers specialise in strategy
formulation and functional managers focus their efforts on tactics. No one of these tasks
is more important than any other. Missions and objectives will never be achieved without
strategies and tactics. Strategies without missions and objectives will be unfocused. Strategies
without tactics are usually not implemented. And plans without strategies or missions are not
likely to improve a firm’s performance.
A third strength of the hierarchical definition is that it emphasises the fact that strategy,
in order to have an impact on performance, cannot remain simply an idea in an organisation. Rather, it must be translated, through resource allocation, into action. An organisation’s
mission is often a statement of an idea, or a manifestation of the values, of top management.
However, by itself a mission statement is likely to have little impact on a firm’s performance. Rather, this mission statement must be linked with objectives, strategies and tactics. In
choosing objectives, strategies and tactics, managers must make tough decisions, set priorities

8

CHAPTER 1 introduction

and allocate resources. Firms that translate their mission into actions increase the probability
that they will improve their performance (McGuire et al., 2012).

Weaknesses of the hierarchical approach to marketing planning

SMEs
Small and medium-sized
enterprises. In the EU,
SMEs are characterised as
having 250 employees or
less; they comprise
approximately 99 per
cent of all firms.

1.3

The most important weaknesses of the hierarchical approach are as follows. First, it has a
very underdeveloped notion of the external competitive environment’s impact on strategy
formulation and implementation. Mission statements summarise where the senior management want an organisation to be in the long run, but the development of these statements is
encouraged to focus inward. In choosing a mission, senior managers are encouraged to look
inward, evaluating their own personal priorities and values. Certainly, this kind of analysis is
an important step in developing a firm’s mission.
Indeed, part of this book is devoted to this kind of internal analysis. Such an analysis,
however, must be linked with the external analysis (Part II) in order for firms to choose
missions, objectives, strategies and thus marketing plans that will add value to the firm.
A second weakness of the hierarchical definition is that it tends to focus, almost exclusively, on formal, routine, bureaucratic strategy-making processes. In this definition, strategic choices are made through systematic study and analysis. These analyses result in
coherent, self-reinforcing sets of strategies that, taken together, lead a firm to reach its objectives and mission. There is little doubt that many organisations choose at least some of their
strategies in this logical and systematic way. An enormous amount of research on formal
strategic planning suggests that more and more firms are adopting explicit and formal planning systems to choose their strategies. The hierarchical definitions presented in Figure 1.1
tend to emphasise this formal, systematic aspect of choosing and implementing strategies.
Yet not all strategies are chosen in this way. Small and medium-sized enterprises (SMEs)
choose strategies by discovering an unanticipated opportunity and exploiting that opportunity
to improve performance, resulting in ‘emerging strategies’ (Mintzberg, 1987; Mintzberg and
Waters, 1985). Firms also choose strategies ‘retroactively’ – that is, they engage in certain kinds
of behaviour over time, and then, only after that pattern of behaviour is in existence, senior
managers label these actions as a coherent or consistent strategy. Some firms stumble into
their strategy by chance. All these are ways that firms can choose strategies, yet none of them
is consistent with the formal, systematic strategic management process presented in Figure 1.1.
A third weakness of hierarchical approaches to defining strategy and strategic management is that, despite their apparent rigour and clarity, they often fail to give significant guidance to managers when they are applied in real organisations. There are literally thousands of
objectives that an organisation could choose to support any given mission statement. Which
objectives a firm should choose, which should be given priority and which should be ignored
are questions that must be answered logically and with ideas that are not provided in the
hierarchical definition. Moreover, there may be thousands of different strategies that firms
could choose to support any given set of objectives. Which particular strategies a firm should
choose goes beyond the hierarchical model.

The traditional (transactional) marketing (tm) concept versus
the relationship marketing (rm) concept
The American Marketing Association (AMA), an international organisation of practitioners
and academicians, defines marketing as follows:
Marketing is the process of planning and executing the conception, pricing, promotion, and
distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.

CHAPTER 1 introduction

Efficiency
A way of managing
business processes to a
high standard, usually
concerned with cost
reduction.
4Ps
The basic elements
of the marketing
mix: product, place
(distribution), price and
promotion; also called
the controllable variables
of marketing, because
they can be controlled
and manipulated by the
marketer.
Mass marketing
One-to-many
communications
between a company and
potential customers with
limited tailoring of the
message.

9

This definition describes what the traditional (transactional) marketing concept is: the
conception, pricing, promotion and distribution of ideas, goods and services. Moreover, the
definition implies a list of activities for the marketer to undertake: the planning and execution of
these four elements of competition so that individual and organisational objectives are satisfied.
Another characteristic of transactional marketing is the belief that independence of choice
among marketing players provides a more efficient system for creating and distributing
marketing value. Maintaining an arm’s length relationship is considered vital for marketing
efficiency. Industrial organisations and government policy makers believe that independence
of marketing players provides each player freedom to choose his/her transactional partners
on the basis of preserving their own self-interests at each decision point. This results in the
efficiency of lowest-cost purchases through bargaining and bidding.
The so-called 4Ps are the epitome of what should be done and are also known as the
‘marketing mix’. This transactional, micro-economic and teacher-friendly marketing framework is straightforward to understand and use. Indeed, in the 1950s and 1960s the 4Ps
approach proved very successful. In the USA this was the era of mass manufacturing and
mass marketing of packaged consumer goods and, because of that, marketing was often more
about attracting than retaining customers.
The model of transaction marketing (as in the 4Ps) rests on three assumptions:
1 there is a large number of potential customers;
2 the customers and their needs are fairly homogeneous;
3 it is rather easy to replace lost customers with new customers.

Looking at today’s markets, and certainly when moving from consumer markets to industrial
and service markets, this approach may not be appropriate.

The relationship marketing (RM) concept
According to the traditional (transactional) marketing concept, the major focus of marketing
programmes has been to make customers buy, regardless of whether they are existing or new
customers. Often only a small part of the marketing budget has explicitly been allocated
directly towards existing customers.
Since the 1980s, academics have been questioning this approach to marketing (for example,
Grönroos, 1996 and 2006 and Gummesson, 1999). They argue that this approach to marketing
is no longer broad enough because of the importance of customer retention, the changes in
the competitive environment and the limitations of transaction marketing.
In Europe, this new direction of marketing thought was mainly initiated by the IMP
(Industrial Marketing and Purchasing Group).
According to Gordon, 1998: 9:

Relationship marketing is the ongoing process of identifying and creating new value with
individual customers and then sharing the benefits from this over a lifetime of association.
It involves the understanding, focusing and management of ongoing collaboration between
suppliers and selected customers for mutual value creation and sharing through interdependence and organizational alignment.

RM not only attempts to involve and integrate suppliers and customers. Besides a need for
focusing on customer retention, Payne (1995) emphasises that RM indicates a shift towards
the organisation of marketing activities around cross-functional activities. Payne (1995)
presents a model Figure 1.2 where six markets need to be considered if the customer is to be
served satisfactorily.
Customers remain the prime focus in the centre of the model but, as shown in Figure 1.2,
there are five other markets where a detailed marketing strategy may be needed.

10

CHAPTER 1 introduction

Internal markets
Internal marketing:
every employee is an
internal customer
or an internal supplier

Learning curves
Track the decreasing
cost of production and
distribution of products
or services over time as
a result of learning by
doing, innovation and
imitation.
Paradigm
A shared way of thinking
or meta-theory that
provides a framework for
theory.
Brand
An identifying feature
that distinguishes one
product from another;
more specifically, any
name, term, symbol, sign
or design, or a unifying
combination of these.

RM attempts to involve and integrate customers, suppliers and other infrastructural partners into a firm’s developmental and marketing activities. Such involvement results in close
interactive relationships with suppliers, customers or other value chain partners of the firm.
Relationships are the fundamental asset of the company. More than anything else – even
the physical plant, patents, products or markets – relationships determine the future of the
firm. Relationships predict whether new value will continue to be created and shared with the
company. If customers are amenable to a deepening bond, they will do more business with
the company. If employees like to work there, they will continue along their learning curve
and produce more and better. If investors and bankers are happy with their returns, they will
continue to keep their funds in the company.
Thus, the development of relationship marketing points to a significant paradigm shift in
marketing: competition and conflict to mutual cooperation, and independence and choice to
mutual interdependence, as illustrated in Figure 1.3.
Today, many companies realise the importance of the RM approach but most companies
still operate with a mixture of the TM and RM approaches. Some firms are attaching more
weight to RM than others, and vice versa.
RM emphasises cooperation rather than competition and consequent conflict among
the parties. It also emphasises cooperation rather than competition and consequent conflict
among the marketing players. The exchange-based transactional marketing approach is based
on a notion of mass markets where individual customers are anonymous. The goal is to make
customers choose one particular brand over competing brands. This easily creates a situation
of competition between the marketer and the customer.
In transaction marketing situations, customers, as unidentified members of a segment, are
exposed to a number of competing products, and they are supposed to make independent

Business-to-business
(B2B)
Marketing that involves
exchange relationships
between two or more
business customers and
suppliers.

choices from among the available options. The two parties have conflicting interests. The
starting point is that the customer does not want to buy; he or she has to be persuaded to
do so.
In RM, where interactions and cooperation exist at some level, the customer and the
supplier or service provider are not totally isolated from each other. The relationship is based
on value creation in interactions between the supplier or service provider and the customer.
Cooperation is required to create the value that the customer is looking for. Of course, this does
not mean that conflicts could not exist; however, cooperation is the driving force, not conflict.
In situations where there are a limited number of customers and/or where continuous
interaction with customers occurs, a relationship approach is relatively easy to adopt, if this is
considered profitable and appreciated by the customers. This is the case in many business-tobusiness (B2B) markets and in service markets. When a firm has mass markets with limited
direct contact with its customers, a relationship approach is less obvious.

Importance of customer retention
Recently, evidence has been provided about the value of long-term customer relationships
and on how to improve performance by focusing on customer retention instead of single
sales. It suggests that it can be up to ten times more expensive to win a customer than to retain
a customer – and the cost of bringing a new customer to the same level of profitability as the
lost one is up to 16 times more (Peppers and Rogers, 1993). Further evidence is provided by
Lindgreen and Crawford (1999), who show that increasing customer retention from 80 per
cent to 94 per cent in a food catering business quadrupled the value of its average customer.
Moreover, existing satisfied customers can make up about two-thirds of the volume for an
average business (Vavra, 1995).
Some important differences between the two marketing orientations are highlighted in
Table 1.2.
It has been said that transaction marketing is too simplified a framework for today’s businesses as they are confronted with many competitive challenges. Since the 1990s, markets

12

CHAPTER 1 introduction

Table 1.2 Transactional and relationship marketing
Category

Transactional marketing

Relationship marketing

Focus

Economic transaction.
Decision focus on product/ brand and 4Ps.

Decision focus on relationships between firms
in a network and individuals.

The marketing
environment

Marketing rules are very clear, defined and
constant.
Market is bound by countries and regions.

Marketing rules are relatively clear, defined and
constant.
Market is relatively bound by network and
alliances.
The boundaries between firms are blurred, if
not completely eroded.

Parties involved

A firm and buyers are involved in a general
market. Distant and impersonal contact.

Dyadic relationships: sellers, buyers and other
firms. Face-to-face, close interpersonal contacts
based on commitment and trust.

Goals

Each party’s goals and objectives, while similar,
are geared to what is best for them.

Shared goals and objectives ensure common
direction.

Managerial intent

Transaction/sales volume and creating new
customers are considered a success.
Customer attraction (to satisfy the customer at
a profit).

Keeping the existing customers, retention, is
considered to be a success.
Satisfy the customer, increase profit and attain
other objectives, such as increased loyalty,
decreased customer risk, etc.

Production focus

Mass production

Mass customisation

Communication

Communications structured and guarded.

Open communication avoids misdirection and
bolsters effective working relationships.

Customers

Low customer interactivity.
Customers are less knowledgeable and
­informed.

High customer interactivity.
Customers are aware and informed. Their feedback can be immediate.

Competitive
advantage/
differentiation

The quality of the product is important for
­differentiation.
The marketing mix can be used for the
­differentiation.

Creativity is important for differentiation.
Long-term and close relationships,
adaptation and putting the customer at the
centre of the organisation are a source of
­differentiation.

Balance of power/
sharing

Active seller – less passive buyers.
Suspicion and distrust. Each party wary of the
motives and actions of the other.
Sharing limited by lack of trust and different
objectives. Often opportunistic behaviour.

Seller and buyer mutually active and adaptive
(interdependent and reciprocal).
Mutual trust forms the basis for strong working
relationships.
Sharing of business plans and strategies.

Organisation/
managerial level

Functional marketers (e.g. sales manager,
­product development manager).
Marketing is a concern of the marketing
­department.

Managers from across functions and levels in
the firm.
Everyone in the organisation is a part-time
marketer.
Specialist marketers (e.g. key account managers).

Formality

Formal (yet personalised via technology).

Formal and informal (i.e. at both a business and
social level).

Duration

Discrete (yet perhaps over time). Short-term.

Continuous (ongoing and mutually adaptive,
may be short- or long-term).

General
advantages/
disadvantages

Advantage: independence of buyer and seller.
Disadvantage: the firm is in a vulnerable
­situation if a competitor makes a better offer to
the customer.

Advantage: intimate knowledge of needs and
markets (developed over time), which has been
likened to reading the minds of customers.
Disadvantage: the firm is in a vulnerable
­situation if its business supplier (customer)
disappears.

Value chain
Chain of activities by
which a company brings
in materials, creates a
good or service, markets
it and provides service
after a sale is made. Each
step creates more value
for the consumer.

1.4

13

have generally become mature and there is only little possibility for product differentiation.
Therefore, customer retention is becoming more important.
RM suggests that the company should focus on the ultimate market segment and serve
customers as individuals. Companies can give individual customers, or logical groups of
customers (where serving the individual uniquely makes no sense to either customer or
supplier), the value each wants by using technology appropriately throughout the value chain.
Often this means taking apart existing business processes and inserting technology into them.
For example, when the Internet is used for online ordering, the process for purchasing has
been redesigned.
However, all this does not exclude transaction marketing. In a way, TM and RM become
part of the same fundamental paradigm: focus on customer satisfaction.
Although RM is a strong strategic concept, its implementation requires the use of powerful
instruments. This instrumental dimension was largely neglected in the early academic
discussion of the RM concept. Nevertheless, most companies and scholars do use the transactional paradigmatic framework when identifying adequate marketing instruments for
building and maintaining relationships with customers.

Balancing the transactional and relationship concepts
throughout the book
This book links between the traditional marketing (TM) approach and the relationship marketing (RM) approach. Some chapters (2–5) concentrate more on the traditional
marketing approach, whereas Chapter 6 attempts to draw all the factors together into a true
relationship (between-the-boxes) approach (between-the-boxes approach). The curved arrow
next to Chapters 2–5 in Figure 1.4 indicates that the actors (firm, customer and competitor)
are treated more independently of the relationship approach. In other words, these four chapters do not focus so much on the relationships to other important players in the value chain.
These relationships (double arrows between the firm and the other actors) are then covered
in Chapter 6, which also includes the firm’s relations to suppliers and complementors. Hence,
though there seems to be a paradigm shift going on from the transactional to the relationship
marketing approach, most companies are still practising a mixture of both.

1.5

How the RM concept influences the traditional
marketing concept
In the following, some of the consequences of a relationship orientation for the traditional
four marketing parameters (4Ps) are given (Håkansson and Waluszewski, 2005).

Product
Product concept
The end result of the
marketing strategist’s
selection and blending of
a product’s primary and
auxiliary components
into a basic idea
emphasising a particular
set of consumer benefits;
also called the product
positioning concept.

A key impact of RM on product policy is the integration of customised elements in what were
previously standardised products for mass markets. Modern information technology allows firms
to individualise their products and services according to the varying needs of their customers.
RM, when appropriately implemented, results in products being cooperatively designed,
developed, tested, piloted, provided, installed and refined. Products are not developed in
the historical way, with the company producing product concepts, researching these with
customers and then engaging in various research and development initiatives – leading to
product introduction some time later. Rather, RM involves real-time interaction between
the company and its priority customers as the company seeks to move more rapidly to meet

Figure 1.4 Balancing the concepts of transactional and relationship marketing

customer requirements. The product is therefore the output of a process of collaboration that
creates the value customers want for each component of the product and associated services. Products are not bundles of tangible and intangible benefits that the company assembles
because it thinks this is what customers want to buy. Rather, products comprise an aggregation of individual benefits that customers have participated in selecting or designing. The
customer thus participates in the assembly of an unbundled series of components or modules
that together constitute the product or service. The product resulting from this collaboration
may be unique or highly tailored to the requirements of the customer, with much more of the
customer’s knowledge content incorporated into the product than was previously the case.

Price
Traditional marketing sets a price for a product, perhaps discounting the price in accordance
with competitive and other marketplace considerations. The price seeks to secure a fair return
on the investment the company has made in its more or less static product.

CHAPTER 1 introduction

Customer lifetime value
(CLTV)
The present value of
the future cash flows
attributed to the
customer relationship
or the amount by which
revenue from a given
customer over time will
exceed the company’s
costs of attracting,
selling and servicing
that customer. Use of
customer lifetime value as
a marketing metric tends
to place greater emphasis
on customer service
and long-term customer
satisfaction, rather than
on maximising shortterm sales.
Trade-off
The balancing of two
different options: if you
have chosen a certain
option, with certain
advantages, you also
have to live with some
disadvantages.

7P mix
Besides the traditional
4Ps (product, price,
place and promotion) it
invo­lves the additional
3Ps: People: This is where
it all begins. It involves
employees, management
and the organizational
culture. Process: It is
the back-office, which
represents the way the
company’s products and
services are delivered.
It involves supply chain
management, logistics
and service delivery.
Physical evidence: It
is how the company’s
products and services
are presented in the
market place. It invo­lves
facilities, store front,
visual packaging, staff
behaviour and staff
dressing.

15

Relationship-orientated pricing is centred on the application of price differentiation strategies. The pricing should correspond to customer lifetime values (CLTV). This proposal
represents an attempt to estimate the net present value of the current and future potential of
various customers or customer segments.
In relationship marketing, the product varies according to the preference and dictates
of the customer, with the value varying commensurately. So when customers specify that a
product should have a specific feature and that certain services should be delivered before,
during and after the sale, they naturally want to pay for each component of the package separately. Just as the product and services are secured in a process of collaboration, so too will the
price need to reflect the choices made and the value created from these choices.
Business-to-business marketers, especially for larger capital goods and installations,
have typically engineered the products and services to customer requirements and negotiated the prices of their services. But customers have not often been involved in all aspects of
the value chain and the price/performance trade-offs that sellers have thought were necessary. RM invites customers into the pricing process, and all other value-related processes,
giving customers an opportunity to make any trade-offs and to further develop trust in the
relationship.

Distribution
The general message of RM regarding distribution is that it should get closer to the customer.
Conventional marketing thinking sees distribution as the channel that takes the product from
producer to consumer. In the case of the computer industry, Dell sees distribution as a direct
sales approach, primarily using the Internet, telephone sales and order placement, whereas
IBM uses many approaches to distribution, including its own stores, a direct sales force and
retailers that resell the firm’s personal computers. RM instead considers distribution from the
perspective of the customer – who decides where, how and when to buy the combination of
products and services that constitute the vendor’s total offering. Seen this way, distribution is
not a channel but a process. The process allows customers to choose where and from whom
they will obtain the value they want. Continuing the computer example just mentioned, the
customer can choose whether to buy an off-the-shelf model from a reseller and take it home
immediately, order one to be built to individual preferences at the factory and shipped within
a week or so, or have one configured in-store that will be available within a few days. It thus
may be more accurate to think of distribution as placement, giving customers choices with
regard to the locations at which they will specify, purchase, receive, install, repair and return
individual components of the products and services. That is, whereas traditional marketing
considers a product as a bundled package of benefits, RM unbundles the product and service
and allows the customer to initiate a placement decision for each element.

Communication (promotion)
Traditional marketing sends smoke signals for all within a specific market segment to see.
‘Buy me’, the signals say to all who can see them. RM instead gives individual customers an
opportunity to decide how they wish to communicate with the enterprise, how often and with
whom. Mass promotion becomes support to build equity in the firm or brand, rather than a
means to influence purchase directly.
The RM approach indicates the need for integrated communication and the demand for
interactive communication.
Technology can make promotion become communication because technology can help
individuals and international-orientated companies to interact more frequently and more
effectively across borders (Czinkota and Samli, 2007). For the producer in the B2B market
this communication may involve opportunities for supplier and customer to interact at the
strategic level – considering each other’s plans, customers, strategies and initiatives – so that
both can consider how best to be interdependent over the planning horizon. It may also tie

16

CHAPTER 1 introduction

into the customer’s and supplier’s information and communications systems, letting staff in
each firm feel as though they work with the other in an integrated way. In this way, the lines
between supplier and customer can be further blurred. People are naturally prone to engage
in relationships and social interactions with those of similar interests.
Producers in the B2C market could relate and communicate in much the same way with
their channel intermediaries, such as the retailers. And now, with technology, customers can
be interactively and uniquely engaged. Using technologies such as the Internet, and social
media such as Facebook and Twitter, companies can give consumers a host of options for
communicating with the company and have information on hand to engage, inform and
direct each customer with complete knowledge as to the customer’s preferences and behaviours. As a consequence, marketing academics are beginning to study the impact of social
media on marketing communication.
The introduction to Part IV discusses the extended version of the 4P mix – the so-called
‘7P’ mix. Then Part IV of this book further develops the implications of the RM approach on
the traditional 4P marketing mix (product, price, place and promotion).

1.6

Different organisational forms of RM

Strategic alliances
Informal or formal
arrangements between
two or more companies
with a common business
objective.

It is important to understand the nature of relationship. The boundaries of RM have been
discussed since RM was first investigated in the 1970s (Healy et al., 2001).
It is possible to study relationships in different contexts. Figure 1.5 presents a context where
it is possible to study relationships in three ways.
The dyadic relationship is the basic, irreducible building block of inter-firm relationships.
It can be used as the basis for studying a number of marketing phenomena, ranging from
buyer–seller relationships, salesperson–purchasing agent interactions to inter-firm relationships and strategic alliances.
Thus, a chain of relationships’ key distinction from RM is that although the unit of analysis
is still dyadic, the dyad can be other than one buyer–seller relationship. Furthermore, more
than one dyad can be involved in any given exchange.

Dyadic relationship
Example

Chain of relationships

Networks

Example

Example
Bank
Dyad

Focal
firm
(seller)

Dyad
Buyer

Subsupplier

Dyad
Focal
firm

Subsupplier

Dyad
Distributor

Competitor
Focal
firm

End
customer
Industry
association

Customer
Governmental
department

Explanation

Explanation

Explanation

A dyadic buyer–seller relationship that
tends to ignore the role of other elements
in the distribution channel and the role of
other stakeholders.

The relationship is still dyadic but goes beyond
the buyer–seller relationship to include all
marketing activities directed towards establishing,
developing and maintaining successful relational
exchanges in the total vertical value chain. This
results in several dyadic relationships along the
vertical chain.

A more complex structure of relationships or networks
involving three or more actors.

Figure 1.5 Forms of relationships

CHAPTER 1 introduction

Stakeholders
Individuals or groups
having a stake in the
organisation’s well-being,
such as shareholders or
employees.
Guanxi
Describes a personal
connection between
two people in which one
is able to prevail upon
another to perform a
favour or service, or
be prevailed upon. It
is based on a complex
nature of personalised
networks of influence and
social relationships, and
is a central concept in
Chinese society.

1.7

17

From the relationship background, network theory evolved when researchers started
looking beyond simple dyadic relationships and began to concentrate their research effort on
the more complex structures of networks.
Network theory has been based on the players–activities–resources model, which suggests
that networks are dynamic entities exhibiting interdependence and connectedness between
actor bonds, activity links and resource ties (Håkansson and Johanson, 1992; Håkansson and
Snehota, 1995). Networks that involve three or more players place great emphasis on the role
of marketing in building and managing relationships with a company’s many stakeholders,
which could include suppliers, competitors, governments and employees, as well as customers.
A related RM concept in Chinese culture is the so-called guanxi. It is composed of two
Chinese characters: ‘guan’ (gate) and ‘xi’ (connection). It is a special type of relationship that
bonds the exchange partners through a continual cooperation and exchange of favours.
Western RM and Chinese guanxi share some basic characteristics, such as mutual understanding, cooperative behaviour and long-term orientation. In the Western RM society,
written contracts are necessary to bind the exchanging partners to follow the rules, even
among long-term relationship partners. In contrast, Chinese network systems emerge from
personal agreement, not written contracts. Chinese B2B relations are often based on contracts
or bonds between specific individuals, not between organisations. While China (among other
Asian countries) is often portrayed as a ‘relational society’, it is also a low-trust society in
which relationship orientation is only applied to insiders of the guanxi networks, but not to
outsiders of networks such as a foreign firm. Guanxi members are tied together through an
invisible and unwritten code of reciprocity, and the underlying motive for reciprocal behaviours is face-saving (Wang, 2007).

Summary
Over the past twenty years, considerable emphasis has been placed on the importance of
relationship marketing (RM). The reorientation of marketing has been at the expense of the
traditional approach to marketing – that is, transactional marketing (the 4Ps). However, the
premises of this book are that transactional marketing is still relevant and should be practised
concurrently with various types of RM.
In RM, customers take a much more active role than they normally are given. The success
of RM also, to a large extent, depends on the attitudes, commitment and performance of
the employees. If they are not committed to their role as part-time marketers and are not
motivated to perform in a customer-orientated fashion, the strategy fails. Besides customers
and internal employees, the stakeholder view also includes other players in the RM process:
suppliers, competitors and other external players.
The chapter ends with a categorisation of RM into three forms of organisation: dyadic relationships, chain of relationships and networks. The classic dyadic buyer–seller relationship
tends to ignore the role of other stakeholders, whereas networks are a more complex structure
of relationships involving several stakeholders.

The Hunter boot brand (www.hunter-boot.com) has
become a symbol of British country life and celebrity
fashion. Hunter boots, designed over 150 years ago, were
originally created to deal with Britain’s rugged and unpredictable weather. Today, Hunter is firmly established as a
fashion brand beloved by Hollywood celebrities.
Arthur Wellesley, the first Duke of Wellington, instructed
his shoemaker, Hoby of St James Street, London, to modify
his eighteenth-century boot. They designed the boots in
soft calfskin leather, removed the trim and made the cut
closer around the leg. It was hard to wear the new boots in
battle but it was said that the Duke of Wellington wore the
boots at the famous Battle of Waterloo in 1815. The boots
were dubbed ‘Wellingtons’ or ‘wellies’ and the name stuck.
Wellingtons quickly caught on with patriotic British
gentlemen eager to emulate their war hero. The original Wellington boots were made of leather; however, in
America, where there was more experimentation in shoemaking, producers were beginning to manufacture using
rubber. One such entrepreneur, Mr Henry Lee Norris,
moved to Scotland in search of a suitable site to produce
rubber footwear. Eventually he found it on the farm of the
Castle Mill in Edinburgh. Norris began his boot-making
company, the North British Rubber Company (the company
changed its name to the Hunter Rubber Company in 2004),
in 1856. Committed to fit, comfort, durability and performance Hunter Wellington boots bear two rare and coveted
stamps of approval of the British royal family.

Source: Jeffrey Blacker/Alamy Images.

Production of the Wellington boot was dramatically
boosted with the advent of World War I, due to the demand
for a sturdy boot suitable for the conditions in flooded
trenches. This made the wellies a functional necessity.
By the end of World War I, the North British Rubber
Company had produced more than 1.8 million pairs of
boots for soldiers. Shoe production ran 24 hours a day.
Again the Wellington made an important contribution
during World War II. At the outbreak of war in September
1939, although trench warfare was not a feature, those
forces assigned the task of clearing Holland of the enemy
had to work in terrible flooded conditions. By the end of
the war, the Wellington had become popular among men,
women and children for wear in wet weather. The boot had
developed to become far roomier with a thick sole and
rounded toe. Also, with the rationing of shoes at that time,
labourers began to use them for daily work.
The company’s most famous welly, the original Green
Wellington, was made over 50 years ago in the winter of
1955. It was launched alongside the Royal Hunter – another
boot that remains in Hunter’s range today.
From 1966 to 2005 a number of ownership changes
took place, and in 2006, the Hunter Rubber Company was
placed into administration as a result of cash flow problems.
In spite of a reported turnover of over £5 million, accountants from KPMG said the firm suffered from high manufacturing costs, including fuel costs, and made a loss from the
expansion of its business to the US. Hunter reported a loss
of £600,000 from September 2003 to the end of
February 2005, when it had a net debt of £2.03
million.
In 2006, a private consortium led by Lord
Marland, Peter Mullen and Julian Taylor bought
Hunter out of administration and Hunter Boot
Ltd was born. After rapid restructuring of the
company, new supply routes and distribution
partners were found in the UK and the US and
the Hunter portfolio was rationalised to core
products exhibiting the key skills and tradition
of the company.
Hunter re-established itself as a major player
in the traditional country and leisure footwear
market in the UK in the aftermath of the 2006
acquisition and positioned itself as a strong
contender in the US — opening showrooms on

CHAPTER 1 CASE STUDY

Seventh Avenue in New York and Carnaby Street in London.
A new management team was also put in place.
One Hunter Wellington tall boot is made from 28 individual parts. Each part is individually tailored and assembled by hand to support specific parts of the foot, calf and
ankle. Hunters continue to be made and finished by hand
from natural rubber. Because of this degree of ‘handmade’
in the production of Hunter boots, the management moved
manufacturing from Scotland to China to cut production
cost. Retail prices were also increased by 20 per cent, and
modern ranges in a selection of colours and textures were
added.
A major breakthrough for Hunter in the realm of fashion,
as opposed to farms, came in 2006 when Kate Moss was
seen wearing an Original pair in black at the Glastonbury
music festival. Since then, the Hunter boot has become a
familiar sight among celebrities, on catwalks and on high
streets, as well as in the countryside.
In September 2008, following the 2008 Olympics in
Beijing, China, Hunter Boot Ltd sent specially made gold
Wellington boots to every member of the Great Britain
Olympic team who had won a gold medal at the Games.
In 2010 the UK Prime Minister David Cameron bought
pink and purple pairs of Hunter boots for his US trip, as gifts
for Barack Obama’s daughters.

Jimmy Choo for a limited-edition black Wellington boot,
embossed with signature Jimmy Choo crocodile print and
containing gold rivets and a leopard-print lining. Another
boot was then launched in 2011. The boots costs £250 and
were sold exclusively online at www.jimmychoo.com (the
original version normally costs around £80).
Jimmy Choo and Hunter Boot Ltd received a tremendous
reaction from customers; the online waiting list opened on
1 May, and by 16 May more than 4,000 fashion-conscious
customers had already joined it. Today, the luxurious
Wellington boots have become a classic lifestyle item at
Jimmy Choo and can be purchased regardless of the season,
and not only in traditional black, but in several variations.
In March 2012, J. Mendel and Hunter — two iconic brands
dating back to the nineteenth century — joined forces in a
special collaboration to produce the most glamorous of
Wellington boots: exclusive to North America, these limitededition boots brought together the sumptuous look and feel
of J. Mendel with the ­timeless functionality of Hunter Boot.
The boots went on sale in November 2012 and retail at from

Hunter Boot Ltd today
Since the downturn in 2006, Hunter has expanded its sales
and profits rapidly, as seen in Table 1.
Hunter has since seen strong growth with international
distribution in 30 countries.

Hunter is moving into alliances with exclusive
fashion designers
In January 2009, Hunter announced that it would be
collaborating with London-based luxury fashion designer

$585 (£366) to $795 (£497) at Saks, Nordstrom, Gorsuch and
hunter-boot.com.
Hunter Boot Ltd has always been highly dependent on
the celebrity factor. It has become something of a sport
to collect photographs of celebrities wearing different
Hunter boots. Here are some examples of the Hunter brand
preferred by some celebrities:
●

Jennifer Aniston — original black Hunter wellies

●

Drew Barrymore — original navy Hunter wellies

●

Kate Moss — original black Hunter wellies

●

Sandra Bullock — original navy Hunter wellies

●

Alexandra Burke — short original black Hunter boots

●

Kings of Leon (Group) — WaterAid Hunter wellies

●

Angelina Jolie — original red Hunter wellies

●

Madonna — original navy Hunter wellies

●

Gwyneth Paltrow — original aubergine Hunter wellies

●

Kelly Rowland — original red Hunter wellies.

Questions
1 What are the main reasons for the recent international
marketing success of the Hunter Boots?
2 Recently Hunter has added outerwear (leather footwear
and handbags) to their international product range.
What are the pros and cons of extending the product
range in this way? Should Hunter Boots Ltd include
further products like eyewear and watches?
Sources: Based on www.Hunter-boot.com; bevan2bade’s Blog: ‘Hunter
Wellington Boots and Celebrities’ http://bevan2baderblogs experienceproject.
com/770875.html)

Questions for discussion
1 What are the similarities between relationship marketing (RM) and transactional

marketing (TM)?

2 How does an RM strategy differ from a TM strategy?
3 Which kind of industries could benefit from the use of RM versus TM, and vice versa?
4 In which situations would customers not be expected to be interested in RM?

Part I Video case study
Tata Nano: competitiveness of the world’s
cheapest car

The majority of growth in the global automobile industry
in the coming decade will come from emerging economies
such as India, China and eastern Europe, and the largest
contribution to growth of car markets in these countries
will be the fast-growing small car segment. The increasing
disposable income of the middle-class population is the key
driver of small car markets in developing nations. However,
in developed regions like the US and western Europe, stringent environmental standards are increasing the need for
more fuel-efficient cars.

Tata Motors
The Indian Tata Group (www.tata.com) employs nearly
455,000 people in 85 countries and is India’s largest
conglomerate company, with revenues in 2011–12 equivalent to US$100 billion (equal to 5 per cent of India’s GDP).
The Tata Group comprises nearly 100 companies in seven
business sectors.
One of the companies in the Tata Group is Tata Motors.
Tata Motors is gearing up for the global market as one of
India’s largest automobile makers, manufacturers of buses,
commercial trucks and tractor-trailers, passenger cars
(Indica, Indigo, Safari, Sumo and the ultra-cheap Nano),
light commercial vehicles and utility vehicles. The company
sells its cars primarily in India, but about 20 per cent of
sales come from other Asian countries and Africa, Australia,
Europe, the Middle East and South America. In 2008 Tata
Motors bought the Jaguar and Land Rover brands from
Ford for about US$2.3 billion. Tata Motors has a workforce
of 22,000 employees working in its three plants and other
regional offices across the country.
Tata Motors has a lower than 20 per cent share of the
Indian passenger car market and has recently been suffering
a sales slump. In 2012 the company produced 250,000 cars
and more than 300,000 buses and trucks. Outside India, Tata
Motors sells only a few cars, so their international marketing
experience is weak.
They do, however, have some distinct advantages in
comparison to other multinational company competitors.
There is definite cost advantage as labour cost is 8–9 per
cent of sales compared with 30–35 per cent in ­developed
economies. Tata Motors has extensive backward and

forward linkages and it is strongly interwoven with machine
tools and metals sectors from other parts of the Tata Group.
There are favourable government policies and regulations
to boost the car industry, including incentives for R&D.
The acquisition of Jaguar and Land Rover created financial pressure for Tata Motors, with the company stating that
it wanted to spend some US$1.5 billion over the following
four years to expand the facilities manufacturing the luxury
brands. In addition to giving Tata a globally recognisable
product, the Land Rover and Jaguar deal also gave them an
entry into the US. Through a deal with Fiat, Tata is already
distributing the Italian cars in India and may expand the
offering into South America, a Fiat stronghold.

Development of Tata Nano
In 2008 Tata unveiled the Nano, the cheapest car in the
world, at the Auto Expo in New Delhi. The car seats up to five
people, gets up to 55 miles to the gallon, and sells for about
US$2,230. At first the Nano was sold only in India, but Tata
hoped to export them after a few initial years of production;
the Nano might be exported to Europe in 2014. First shipments to Indian customers took place at the start of 2010.

Part I Video case study

Tata Nano started with the vision of Ratan Tata, the
chairman of Tata Motors’ parent, the Tata Group, to create
an ultra-low-cost car for a new category of Indian consumer:
someone who couldn’t afford the US$5,000 sticker price of
what was then the cheapest car on the market and instead
drove his family around on a US$1,000 motorcycle. Many
drivers in India can only afford motorcycles and it is fairly
common to see an Indian family of four using a motorcycle
to get around.
In India alone there are 50–100 million people caught in
that automotive chasm. Until now none of the Indian car
makers has focused on this segment, and in this respect the
Nano is a great example of the blue ocean strategy.
The customer was ever-present in the development of
the Nano. Tata didn’t set the price by calculating the cost of
production and then adding a margin; rather it set US$2,500
as the price that it thought customers could pay and then
worked back, with the help of partners willing to take on
a challenge, to build a US$2,500 car that would reward all
involved with a small profit.
The Nano engineers and partners didn’t simply strip
features out of an existing car – the tack Renault took with
its Dacia Logan, which sells in India for roughly US$10,000.
Instead, they looked at their target customers’ lives for
cost-cutting ideas. So, for instance, the Nano has a smaller
engine than other cars because more horsepower would
be wasted in India’s jam-packed cities, where the average
speed is 10–20 miles per hour.
The Nano aims to bring the joys of motoring to millions
of Indians, doing for the subcontinent what the Volkswagen
Beetle did for Germany and the Mini for Britain. But the
plan horrified environmentalists who fear that the demand
from India’s aspirational and increasingly middle-class
population – now numbering 50 million in a country with a

25

total 1.1 billion people – for more cars would add to pollution and global warming.

The global automotive industry
In 2012 the worldwide production of passenger cars was
81 million cars. The distribution by country was as follows:
Country

2012
(millions of cars produced)

US and Canada

17

Western Europe

13

Eastern Europe

5

Japan

5

China

19

Korea

2

India

3

Brazil/Argentina

4

Other

13

World total

81

The Tata Nano business model
Tata began the development process with 600 closely
integrated suppliers, only 100 of which remain. Independent suppliers provide 80 per cent of the Nano’s
components, and 97 per cent of the vehicle is sourced
in India. Suppliers such as Bosch worked with Tata and
employed Indian engineers with motorcycle, rather than
automobile, design experience to craft innovative lowcost components.

By focusing on the essentials and encouraging
creativity in making components smaller, lighter
and cheaper, Tata avoided engineering non-functional, non-­essential parts. Bosch, for example,
adapted a smaller and lighter motorcycle starter
for use in the Nano.
European suppliers with production capacity
in India had a big advantage over rivals when
Tata Motors started to look for partners for its
Nano. One reason the Nano is the cheapest car
in the world is because 97 per cent of its parts
are locally sourced. It is impossible to deliver a
low-cost component out of western Europe to a
different place in the world.
Half of the 100 vendors for the project are
located with Tata in a 142-hectare vendor park

26

PART I Assessing the competitiveness of the firm (internal)

difficulties, in meeting those standards. As European and
North American governments continue to establish higher standards, there will be compliance issues.

in Singur next to the new plant that will produce the Nano.
Singur is a suburb of Calcutta in eastern India. Here are some
European suppliers with key parts on the Nano:
Seat belts

Autoliv

HVAC

Behr

Starter motor, engine-control
module, injectors, sensors

Bosch

Transmission speed sensors,
fuel-level sensor, fuel pump

Continental

Fuel filter, air cleaner

Mahle

Glazings

Saint-Gobain

Speed sensors

TT Electronics

Clutches

Valeo

Most of these suppliers can only be profitable on Nano
parts because they produce high-volume parts in a lowwage country like India, where they also conduct some
research and development.

Standardise at every stage of the value chain
Similar to Henry Ford’s ‘any colour so long as it’s black’
approach, the Nano offers consumers few options, and only
a few have any impact on the manufacturing process.
The Nano’s distribution model for India is also new. The
company mobilises large numbers of third parties to reach
remote rural consumers, tailor the products and services
to serve their needs, and add value to the core product or
service through ancillary services. For example, one plant
produces vehicle modules that are then sent to a number
of strategically positioned satellite mini-factories, where the
Nano is assembled and delivered to the buyer. A central
warehouse stocks spare parts and accessories.

As a consequence of these and other barriers (tariffs), the
US$2,500 target base price of Nano for the Indian market
can jump to nearly double the price in a European country:

The actual price that the private car buyer pays could be subs­
tantially higher in heavily taxed countries such as Denmark.

Competition
The five cheapest cars in the world at the beginning of
2012 are:

No.

Model

Producer

Price US$/€

1

Nano

2,500/1,688

Export of Tata Nano to Europe and/or
North America

Tata Motors in
India

2

QQ3

5,000/1,726

There are two clear barriers for Tata Nano when considering
these two regions:

Chery
­Automobiles in
China

3

M800

Suzuki-Maruti
in India

5,200/3,451

4

Merrie Star

Geely Automobiles in China

5,500/3,796

5

S-RV mini SUV

Geely Automobiles in China

5,780/3,989

●

●

Emission standards. Western Europe, Japan and North
America established emissions standards more than a
­decade ago. Emerging markets such as China and India
are adopting European standards, but with a five- to
­seven-year lag. Cars in the lightweight low-cost car segment, with their small engines and modest fuel consumption, will meet current emissions standards.
Safety regulations. North America and Europe have similar
government-developed safety regulations with respect to
seat belts, rollover and rear-, sideand frontal-protection
standards. In developing countries, the standards are
lower, and ultra-low-cost cars will encounter few, if any

Source: Based on www.timesonline.co.uk

There are now several competitors on their way into the
ULLC market:

Renault-Dacia Logan
Renault has already sold 450,000 of the bare bones
US$7,200 (€4,969) Logan sedan since its launch in 2004. The

Part I Video case study

price tag of this stripped-down family car is almost half the
cost of competing sedans.

Hyundai
Hyundai Motors is also working on development of an ultracheap car that will compete against the Nano. Hyundai is
the second-largest car manufacturer in India. Currently,
Hyundai is the biggest rival of Indian car market leader,
Maruti Suzuki India.

VW

27

US$6,000. That will not immediately compete with Tata
Motor’s US$2,500 People’s cars, although in the future Toyota
may jump into the LCC market using Daihatsu’s know-how.
Toyota holds a 16 per cent share of the US car market,
but its sales in emerging markets remain small (e.g. its
market share in India is 3 per cent).
Please watch the video before answering the questions.

Questions

VW also plans to launch a low-cost car called Up! in both
India and Russia. The low-cost car, which will share some of
the components of VW’s compact Polo, is designed to be an
affordable car for developing countries.

1 What could be the main reasons for Tata Motors entering

Toyota

3 What are the barriers for entering Western markets with

Toyota also has plans for entering the Indian low-cost car
(LCC) market. Their new 35-billion-yen (US$343-million)
production facility, located on the outskirts of the southern
city of Bangalore, started production in 2010 with an initial
capacity of 100,000 units a year. The unit price was around

the global small-car market?

2 What are the competitive advantages that Tato Motors
would enjoy with their Nano in emerging markets?
Tata Nano?
Sources: Based on different public sources, including www.tatanano.com, www
.tatamotors.com and Oxyer, D., Deans, G., Shivaraman, S., Ghosh, S. and Pleines,
R. (2008) ‘A Nano car in every driveway? How to succeed in the ultral-lowcost car market’ (2008) A.T. Kearney, Business Journal – Executive Agenda, XI(2),
pp. 55–62.

Introduction to Part I
When the international economy was relatively static, competition was a ‘war of position’ in which firms occupied competitive space like squares on a chessboard. The key to
competitive advantage was where a firm chose to compete. How it chose to compete was
also important but secondary – a matter of execution. However, as markets fragment and
product life cycles accelerate, dominating existing product segments becomes less important. In today’s dynamic business environment a firm’s success depends on anticipation of
market trends and quick response to changing customer needs. The essence of strategy is
not the structure of a firm’s products but the dynamics of its behaviour. In future the goal
is to identify and develop the hard-to-imitate organisational capabilities that distinguish a
firm from its competitors in the eyes of customers.
Part I covers the necessary internal analysis to assess the competitive advantages of
the firm with regard to its customers and other stakeholders in the external environment,
which is the focus of Part II.
The structure of Part I is shown in the diagram below.
Chapter 2 identifies the firm’s core competences, based on the assessment of its
resources and capabilities. Capabilities can be described as what an organisation does
as opposed to what it has (resources or assets). Chapter 3 then continues with how the
core competences might be used in the development of competitive advantages, from the
macro-level (country-specific advantages) to the micro-level (value chain analysis).

Learning objectives
After studying this chapter you should be able to:
explain the difference between the resource-based view (RBV) and the market
orientation view (MOV)
● explain the connection between the RBV and RM
● describe and discuss the different concepts of the value chain
● explain the difference between ‘value creation’ and ‘value capture’
●

30

PART I Assessing the competitiveness of the firm (internal)

2.1

Introduction
Understanding competitive advantage is an ongoing challenge for decision makers. Historically,
competitive advantage was thought of as a matter of position, where firms occupied a competitive space and built and defended market share. Competitive advantage depended on where the
business was located, and where it chose to provide services. Stable environments allowed this
strategy to be successful, particularly for large and dominant organisations in mature industries.
This ability to develop a sustained competitive advantage today is increasingly rare. A
competitive advantage laboriously achieved can be quickly lost. Organisations sustain a
competitive advantage only so long as the services they deliver and the manner in which
they deliver them have attributes that correspond to the key buying criteria of a substantial
number of customers. Sustained competitive advantage is the result of an enduring value
differential between the products or services of one organisation and those of its competitors
in the minds of customers. Therefore, organisations must consider more than the fit between
the external environment and their present internal characteristics. They must anticipate what
the rapidly changing environment will be like, and change their structures, cultures and other
relevant factors so as to reap the benefits of changing times. Sustained competitive advantage
has become more of a matter of movement and ability to change than of location or position.
The question of an enduring value differential raises the issue of why a firm is able to achieve
a competitive advantage. To answer this, it is necessary to examine why and how organisations
differ in a strategic sense. Identifying strengths and weaknesses requires introspection and selfexamination. It also requires much more systematic analysis than has been done in the past.

From capability to advantage
How well a company assembles the capabilities that a new business requires determines how
successful it is at gaining and keeping positional advantage. Some capabilities are more important than others, and combinations are generally harder to imitate than individual capabilities. The business builder’s challenge begins with the need to assemble the capabilities that
are most critical to making money in the business. Lasting competitive advantage comes only
when companies assemble combinations of capabilities that are difficult to imitate.
Competitive advantage may not call for superior capabilities in every area of a business.
But control of the most important capabilities can determine how much of the value of a
growing business will flow to its owner. For every opportunity, it is important to distinguish
the capabilities that influence competitive success from those that are merely necessary to stay
in business. Capabilities that are less critical can be outsourced or controlled by others.

Two theoretical perspectives are particularly relevant for understanding how firms deploy
scarce resources to create competitive excellence. These are: the market orientation view
(MOV) and the resource-based view (RBV).
There is, however, a potential conflict between these two perspectives in the sense that one
(MOV) advocates the advantages of outward-looking responsiveness in adapting to market
conditions, while the other (RBV) is inward looking and emphasises the rent-earning characteristics of corporate resources and the development of corporate resources and capabilities. Quite simply, from a marketing viewpoint, if strategy becomes too deeply embedded
in corporate capabilities it runs the risk of ignoring the demands of changing, turbulent
marketing environments. Yet from a resource-based perspective, marketing strategies that do
not exploit a company’s distinctive competences are likely to be ineffective and unprofitable.

Value chain-based view
(VBV)
Building sustainable competitive advantages based
on the firm’s positioning
in the value chain.

2.3

However, we argue that the value chain-based view (VBV) provides a way of reconciling this potential conflict – it represents a balanced view of the RBV and the MOV – see
Figure 2.1.
We will now look at the two theoretical perspectives.

The resource-based view (RBV)
Most firms that apply a relationship marketing approach are probably somewhere in this stage
of the transition process. A true transition towards a relationship marketing strategy requires
a focus on competences and resources in the relationship (because partners in the relationship use each other’s resources, Grönroos, 1996). This section focuses on identification of a
single firm’s competences from an RBV.
According to the resource-based theory, which has its roots in economic theory (e.g.
Penrose, 1959) and early strategy theory (Ansoff, 1965; Selznick, 1957), the long-term
competitiveness of a company depends on its resources that differentiate it from its competitors, that are durable and that are difficult to imitate and substitute (e.g. Fahy, 2002; Grant,
1991). Each firm is unique, and this uniqueness stems from the resources it possesses, their
compatibility with one another and/or the way they are deployed. Furthermore, this uniqueness is relatively long lasting, because the resources of the company are relatively immobile
(Barney, 1991; Sharma and Erramilli, 2004).
Various definitions and classifications for resources have been proposed in the literature.
The most important in the current context are briefly described here.

Resources
The resources of the firm in the competence-based approach are typically classified into two
types: tangible and intangible resources. Tangible resources are inputs into a firm that can be
seen, touched and/or quantified. They include assets such as plant and equipment, access to
raw materials and finance, a trained and skilled workforce and a firm’s organisational structure. Intangible resources range from intellectual property rights, such as patents, trademarks
and copyrights, to the know-how of personnel, informal networks, organisational culture

32

PART I Assessing the competitiveness of the firm (internal)

and a firm’s reputation for its products (Deering et al., 2008). The dividing line between the
tangible and intangible is often unclear, and how they are classified varies a little from one
writer to another. Despite the problems with classification, proponents of the competencebased approach agree on the relative importance of the two types of resource. Although it is
clear that both types of resource are required for any business to operate, competence-based
theorists argue that intangible resources are the most likely source of competitive advantage.
The reason for this, it is argued, is that, being less visible, they are more difficult to understand
and imitate than tangible resources. As such, they are therefore more likely to be a source of
competitive advantage (Collis and Montgomery, 2008).
I use the word ‘resource’ as the most generic term to qualify the basic unit of asset, skill,
ability, expertise, knowledge, etc. owned and controlled by one firm. Grant (1991) describes
six types of resource: technological, financial, physical, human, organisational and reputation.
Resources are extremely diverse, as shown in Figure 2.2 (examples are given in brackets).
The dotted line in Figure 2.2 represents a specific resource (e.g. technical) measured on six
criteria. However, the resource-based theory does not consider all resources possessed by a
company but focuses only on critical (or strategic) resources, i.e. those that are the basis of the
company’s sustainable competitive advantage. To determine such resources, various authors
have proposed a number of ‘tests’ (see also Grant, 1991; Prahalad and Hamel, 1994; Trott,
Maddocks and Wheeler, 2009), the most important of which are:
●

●

●

competitive superiority test, which evaluates if and to what extent the research contributes
to differentiating the company from its competitors;
imitation test, which analyses actual and potential competitors’ difficulties in imitating the
resource, due, for example, to its physical uniqueness, path dependency, casual ambiguity
or economic deterrence;
duration test, which measures if the resource’s benefits will also be generated in the
long term;

Intangible
(knowledge embodied
in people)

Tangible
(physical facilities)

Unique and inimitable
(brand image)

Easy to access
(without any scarcity)

Unmarketable

Marketable

Systemic
(a complex network of
multiple routines)

Discrete
(centred on one individual
or a team)

Spreadable
(reputation)

Idiosyncratic
(dedicated machinery)

Tacit
(culture, know-how,...)

Explicit
(procedures, patents,...)

Represents a firm’s specific resource
profile measured on six criteria

Figure 2.2 Resource profile

CHAPTER 2 Identification of the firm’s core competences
●

●

33

appropriateness test, which verifies if the company owning the resource is able to exploit
the advantages generated in the market;
substitutability test, which assesses how difficult it is for competitors to replace the ­resource
with an alternative that gives the same advantages.

The very basis of RBV is to increase the ability of the firm to act upon, shape and transform
its environment. The objective is no longer to adapt to the environmental forces but to choose
a strategy that allows the best exploitation (the best return) of resources and competences
given the external opportunities. It means taking into account the external opportunities, but
with the objective of creating value beyond existing market standards. As a consequence, the
strategic options for a firm are derived from its resource profile: the business portfolio is an
output of the search of applications carried out for one competence.

Competence
One resource – such as a privileged access to raw material – may be a source of competitive
edge. However, a greater competitive advantage should emerge from competences – that is,
the combination of different types of resources. It is the way in which these resources are
assembled, or combined, for the execution of an activity that creates the difference between
firms. This distinctive combination of resources emerges through organisational learning.
Competence examples may be found in engineering knowledge, production expertise or
marketing abilities.
Competence may be described by the following three attributes:
1 Proprietariness: a competence is a firm-specific set of resources.
2 Learning: a competence results from years of experience accumulated in a small number of

fields (where the firm may dominate).

3 Pervasiveness: a competence is diffused pervasively throughout the entire firm and exists

within several product lines (or strategic business units – SBUs).

EXHIBIT 2.1
Honda’s competences in small engines
A famous example of a business strategy that
was clearly based on a focus on a core competency is Honda’s application of small-engine
technology to a variety of products requiring
small engines (motorcycles, jet skis, lawn
mowers, etc.).
When Honda introduced motorcycles in
the US market, it had focused most of its attention on selling its higher-value (but problemplagued) motorcycles through a dealer
network. At the same time, it introduced
a series of much smaller motorcycles with
little fanfare through sporting goods stores.
While their larger motorcycles floundered
competing against the likes of firmly established Harley-Davidson, Honda’s smallerengine motorcycles found a ready audience

with a more utilitarian ‘nicest people’ demographic group. This turned out to be Honda’s beachhead into the US
marketplace.
The ability to concentrate on customers and understand their changing needs is the first step in the value
chain-based view.
Although it is true that the small engines in both the motorcycles and the scooters were Honda’s core competence,
that core competence alone did not ensure success. Honda succeeded because it also looked to the other end of the
value chain – it listened to what the customer wanted.
It turned out to be both a customer and a product very different from what Honda had envisioned. Honda quickly
refocused its distribution channels and adjusted its product mix to meet the unexpected market demand. In the long
term, Honda was able to refocus its efforts and eventually capture market share in the higher-value motorcycle market.
Sources: Adapted from Prahalad and Hamel (1990); Webb and Gile (2001).

Core competences
The principal distinctive
capabilities possessed by
a company – what it is
really good at.

A core competence, as articulated by Prahalad and Hamel (1990), has three traits: it makes a
contribution to perceived customer benefits; it is difficult for competitors to imitate; and it can
be leveraged to a wide variety of markets. Knowing a firm’s core competence is important for
developing strategy. By concentrating on the core competence and outsourcing other activities,
managers can use their company’s resources in four ways: they maximise returns by focusing on
what they do best; they provide formidable barriers against the entry of competitors; they fully
utilise external suppliers’ strengths and investment that they would not be able to duplicate; and
they reduce investment and risk, shorten cycle times and increase customer responsiveness.
Figure 2.3 shows the connection between resources, core competences, sustainable competitive advantages and competitive excellence.
Resources alone are not a basis for competitive advantage. It is the way in which resources
are integrated with each other to perform a task or an activity that provides the capability
for an organisation to compete successfully in the marketplace. This being the case, the most
important resource for any organisation is the skill and knowledge possessed by the organisation’s employees. It is this skill and knowledge, acquired over time and embedded in the firm’s
culture, that influences how it operates and determines its success.
Whether or not resources and capabilities have the potential to become core competences
depends on how difficult they are for competitors to acquire and how valuable they are to the firm
as a basis for competitive advantage. When they are rare, difficult to imitate, non-substitutable
and they allow a firm to exploit opportunities or neutralise threats, then they can be considered
core competences and serve as the basis of an organisation’s sustained competitive advantage.
A resource becomes a source of sustainable competitive advantage only if it passes several
tests. First, it must be competitively superior and valuable in the product market. Second, it
must be difficult to imitate. Third, it must not be easy to replace by an alternative capability.
Fourth, it must be durable. Fifth, it must be difficult to move. If the capability can move with
an employee then it is the employee, not the corporation, that will acquire the value.
Some individual capabilities may pass the tests. A world-class brand, for example, will
continue to confer advantage on its owner. But few individual capabilities are unassailable,
and even a first-to-market advantage can fade away without proper support. The key to
sustaining competitive advantage as a business grows is to assemble a bundle of distinctive
capabilities that together satisfy the criteria.
The capabilities in the bundle can be built in-house, borrowed by means of alliances, or
acquired out of house. As each new capability is added to the bundle, greater competitive
advantage accrues because the combination becomes more difficult for competitors to imitate
or substitute, and more difficult for employees to acquire from the company.
Cardy and Selvarajan (2006) classify competences into two broad categories: personal or
corporate. Personal competences are possessed by individuals and include characteristics such

as knowledge, skills, abilities, experience and personality. Corporate competences belong to
the organisation and are embedded processes and structures that tend to reside within the
organisation, even when individuals leave. These two categories are not entirely independent.
The collection of personal competences can form a way of doing things or a culture that
becomes embedded in the organisation. In addition, corporate characteristics can determine
the type of personal competences that will best work or fit in the organisation.

2.4

Market orientation view (MOV) compared to the ­
resource-based view
The MOV, or fit model, suggests that the firm adapts its assets to its environmental constraints
in order to obtain a fit with the environment. Basically, MOV is about adapting to the market
environment (Kohli and Jaworski, 1990). It can be understood as a culture, rather than a set

36

PART I Assessing the competitiveness of the firm (internal)

Table 2.1 Main differences between the resource-based view and the market orientation view

Business model
The fundamental strategy
underlying the way a
business unit operates.
Customer value
The difference relation
between the values the
customer gains from
owning and using a
product and the costs of
obtaining that product.

Exploitation
Exploiting current
markets enables the
firm to secure efficiency
and endows it with
short-term success and
bottom-line profits in a
few, well-defined market
segments, without too
much complexity.
Exploration
Exploration refers
to generating new
knowledge, searching
for new marketing
possibilities and
ensuring long-term
survival by reviewing
the firm’s product- and
market portfolio in an
experimental way.

Market orientation view
(MOV)

Resource-based view (RBV)

Basic principle

Adapt firm’s resources to the
requirements of its competitive
environment, i.e. to key success
factors

Proactive quest for environments that allow the best
­exploitation of the firm’s
resources

Strategic analysis

Centred on industry structure
and market attributes

Emphasis on internal diagnosis

Formulation process

Outside-in

Inside-out

Source for competitive edge

Market positioning in
relation to local competitive
environment

Firm’s idiosyncratic set of
­resources and competences

of behaviours and espoused values (Beverland and Lindgreen, 2005). MOV can be defined
as a culture in which all employees are committed to the continuous creation of superior
value for the customers (Vesanen, 2007). However, adaptation to different customers in
different countries can be an expensive business model. In this regard, you get very satisfied
customers but the costs involved in producing this customer value/satisfaction might also
be very high.
Table 2.1 summarises the main differences between the RBV and the MOV. As both views
(models) have advantages and disadvantages, a way of bridging the gap between the RBV and
the MOV will now be covered.

Exploitation versus exploration
A key feature of today’s market environment is market turbulence, which refers to the unpredictability of customer needs and preferences. In dynamic markets customer needs shift
rapidly and it is difficult to forecast such changes. Today, marketers are being challenged by
the huge volume of data (‘Big Data’) that is well beyond the capacity of their organisations to
comprehend and use. The accelerating diversity of market demands must be met with a set of
appropriate and matching capabilities to deal with them. The greater the mismatch between
the increasingly fluctuating demands of the market and the relatively immobile and homogeneous resources to the firm, the greater the capability gap (Day, 2011). In other words, the
drivers who are widening the marketing capability gap are increasing the complexity of the
market – interacting with an accelerating rate of market changes and the serious organisational difficulties involved in responding (see also Figure 2.4).
Day (2011) discusses four different strategies for closing the ‘marketing capability gap’. The
starting point is two different dimensions: inside-out (resource-based view) versus outside-in
(market orientation view) and exploitation versus exploration.
Figure 2.5 illustrates the starting point for closing the market capability gap. As shown, the
company faces different options. The static and non-complex characteristic of the ‘exploiting’
alternative is illustrated by showing only one market, whereas the ‘exploring’ alternative is
illustrated by three different markets, where an experimental mindset is needed.
There is a trade-off connected to balancing exploitation and exploration. When there is
much focus on market exploitation, the company may utilise existing market knowledge to
take advantage of a few current markets, which are already known and where the company
can make short-term profits. However, short-term exploitation may also have the consequence that the company could become rigid, inert and slow in chasing new market opportunities. On the other hand, when there is more focus on long-term market exploration, the
company can develop creative and proactive thinking and experimentation, but it may also
pursue market opportunities that are too uncertain, risky and costly.

Combining both exploitation and exploration can provide synergistic outcomes, but as
both concepts compete for scarce resources and managerial attention, having a well-balanced
combination of both concepts is an extremely challenging task, which involves trade-offs.
In order to cope with the ‘marketing capability gap’, Day (2014) recommends that the
company reflects on its business model and its ability to respond adaptively. The company
should analyse what the target customers think and what they actually do. In a time of

38

PART I Assessing the competitiveness of the firm (internal)

a­ ccelerating complexity, deep customer insight should be supported by an early warning
system, where the objective is to combine measures of ultimate success with intermediate
diagnostic (early warning) metrics that can be used to identify a possible widening or
narrowing of the ‘marketing capability gap’. The underlying assumption is that the marketing
mix decisions will become more effective and timely when they are guided by developing the
adaptive marketing capabilities.

2.5

The value chain-based view (VBV)
The RBV focuses on what the firm has, whereas the VBV focuses on what the firm does. In
addition, the VBV integrates some elements of the MOV, but it does not ignore the costs of
performing the activities.
Resources per se do not create value. Rather, value creation results from the activities in
which the resources are applied.
The foundation of competitive advantage is a product and/or service that provides value to
the business’s customers (McPhee and Wheeler, 2006).

The value chain
Porter’s work (1985) is the key reference on value chains and value configuration analysis for
competitive advantage.
Value chains are created by transforming a set of inputs into more refined outputs. The strategic challenges associated with managing a value chain are related to manufacturing products with the right quality at the lowest possible cost. The ways to reduce costs – or increase
value – are primarily found through economies of scale, efficient capacity utilisation, learning
effects, product and information flows and quality measures. Critical drivers of value creation
in chains also include the interrelationships between primary activities, on the one hand, and
product development, marketing and service, i.e. support activities, on the other hand.
The firm’s value chain, as shown in Figure 2.6 for example, provides a systematic means of
displaying and categorising activities. The activities performed by a firm in any industry can
be grouped into nine generic categories.
At each stage of the value chain there exists an opportunity to contribute positively to
the firm’s competitive strategy by performing some activity or process in a way that is better
than the competitors, and so providing some uniqueness or advantage. If a firm attains such
a competitive advantage that is sustainable, defensible, profitable and valued by the market,
then it may earn high rates of return, even though the industry may be unfavourable and the
average profitability of the industry modest.
In competitive terms, value is the amount that buyers are willing to pay for what a firm
provides them (perceived value) less the sacrifices that the customers offer to obtain access to
the value (e.g. money, time). A firm is profitable if the value it commands exceeds the costs
involved in creating the product. According to the ‘formula’ in Figure 2.10, it is implied that
customer-perceived value should be higher than 1. Creating value for buyers that exceeds
the cost of doing so is the goal of any generic strategy. Value, instead of cost, must be used
in analysing competitive position, since firms often deliberately raise their costs in order to
command a premium price via differentiation. The concept of buyers’ perceived value will be
discussed further in this chapter.
The value chain displays total value and consists of value activities and margin. Value activities are the physically and technologically distinct activities that a firm performs. These are
the building blocks by which a firm creates a product that is valuable to its buyers. Margin
is the difference between total value (price) and the collective cost of performing the value
activities.

Logistics
The activities involved in
moving raw materials and
parts into a firm, moving
in-process inventory
through the firm and
moving finished goods
out of the firm.
User
The buying-centre
role played by the
organisational member
who will actually use the
product.
Advertising
Non-personal
communication that
is paid for by an
identified sponsor, and
involves either mass
communication via
newspapers, magazines,
radio, television and other
media (e.g. billboards,
bus stop signage), or
direct-to-consumer
communication via
direct mail.

Competitive advantage is a function of either providing comparable buyer value more
efficiently than competitors (lower cost), or performing activities at comparable cost but in
unique ways that create more customer value than the competitors are able to offer and, hence,
command a premium price (differentiation). The firm might be able to identify elements of
the value chain that are not worth the costs. These can then be unbundled and produced
outside the firm (outsourced) at a lower price.
Value activities can be divided into two broad types: primary activities and support activities.
Primary activities are the activities involved in the physical creation of the product, its sale and
transfer to the buyer and after-sales assistance. In any firm, primary activities can be divided
into five generic categories. Support activities support the primary activities and each other by
providing purchased inputs, technology, human resources and various firm-wide functions.

Primary activities
The primary activities of the organisation are grouped into five main areas: inbound logistics,
operations, outbound logistics, marketing and sales, and service.
1 Inbound logistics are the activities concerned with receiving, storing and distributing the

inputs to the product/service. These include materials, handling, stock control, transport, etc.

2 Operations transform these various inputs into the final product or service: machining,

packaging, assembly, testing, etc.

3 Outbound logistics collect, store and distribute the product to customers. For tangible

products this would involve warehousing, material handling, transport, etc.; in the case
of services it may be more concerned with arrangements for bringing customers to the
service if it is in a fixed location (e.g. sports events).
4 Marketing and sales provide the means whereby consumers/users are made aware of the
product or service and are able to purchase it. This would include sales administration,
advertising, selling, etc. In public services, communication networks (which help users
access a particular service) are often important.

40

PART I Assessing the competitiveness of the firm (internal)

5 Services cover all the activities that enhance or maintain the value of a product or service,

such as installation, repair, training and spare parts.

Each of these groups of primary activities is linked to support activities.

Support activities
These can be divided into four areas: procurement, technology development, human resource
management and infrastructure.
1 Procurement refers to the process of acquiring the various resource inputs to the primary

­activities (not to the resources themselves). As such, it occurs in many parts of the ­organisation.

EXHIBIT 2.2
Nike’s value chain
In the 1980s, Nike learnt that manufacturing had become a commodity that could be outsourced for less cost and
better quality than it could achieve with its internal resources. Nike realised that its core competences were in product
development and marketing, and so management grew the company around a strategy of designing innovative products that met evolving customer needs.

Shoe
manufacturing
and assembly

Marketing

Sporting goods,
departments
and shoe stores

Online catalogue
and other
retailing

Product
development

Customers

Rubber, fabric
and other raw
materials

Nike branded
stores

Customer needs/wants feedback

Figure 2.7 Nike’s simplified value chain
The value chain in Figure 2.7 shows a simplified view of the athletic-shoe industry. Nike owns and controls just
three elements: product development, marketing and its branded retail stores. All serve Nike’s strategic purpose: by
owning and operating its branded stores the firm obtains valuable feedback directly from customers, which drives
new product development. For B2B service providers seeking to do business with Nike, this suggests that some of the
most lucrative opportunities are in supporting new-product development (shoe design and materials technologies),
branded-store architecture and choosing store locations.
Sources: Adapted from Ramaswamy, 2008; Crain and Abraham, 2008, pp. 34–5.

CHAPTER 2 Identification of the firm’s core competences

41

2 Technology development refers to the fact that all value activities have a ‘technology’, even

if it is simply know-how. The key technologies may be concerned directly with the product
(e.g. R&D, product design) or with processes (e.g. process development), or with a particular
resource (e.g. raw material improvements).
3 Human resource management is a particularly important area that transcends all primary
activities. It is concerned with the activities involved in recruiting, training, developing and
rewarding people within the organisation.
4 Infrastructure encompasses the systems of planning, finance, quality control, etc., which
are crucially important to an organisation’s strategic capability in all primary activities.
Infrastructure also consists of the structures and routines of the organisation that sustain
its culture.
Having looked at Porter’s complex value chain model, a simplified version will be used in
most parts of this book (see Figure 2.6). This simplified version of the value chain is characterised by the fact that it contains only the primary activities of the firm.
As indicated in Figure 2.6, a distinction is also made between the production-orientated
‘upstream’ activities and the more marketing-orientated ‘downstream’ activities.

From value chain to value constellation
As markets are getting more complex, the value chain of the single firm cannot be seen
­independently from the value chains of other actors in the market network (Prahalad and
Ramaswamy, 2000).
Normann and Ramirez (1993) argue that strategic analysis should focus on the valuecreating system itself within the different players – suppliers, business partners, customers
and internal employees should work together to co-produce value.
Although value activities are the building blocks of competitive advantage, the value chain
is not a collection of independent activities, but a system of interdependent activities. The
value chains of different players are related to each other by linkages within the total industry
(Jonk et al., 2008). Linkages are relationships between the way in which one value activity is
performed and the cost or performance of another.
In understanding the competitive advantage of an organisation, the strategic importance
of the following types of linkage should be analysed in order to assess how they contribute to
cost reduction or value added. There are two kinds of linkage (see Figure 2.8):
●

●

Prosumer
A contraction of producer
and consumer. Prosumers
are half-consumers and
half-proactive producers
of the value creation.

Internal linkages between activities within the same value chain, but perhaps on different
planning levels within the firm.
External linkages between different value chains ‘owned’ by the different players in the total
value system.

Normann and Ramirez (1993) use the term ‘value constellation’ to describe the ‘chain’ of
different players’ value chains and their relationships (see Figure 2.8). Figure 2.8 also stresses
the importance of information management as a tool for coordinating information between
the different players in the value chain.
The global furniture chain IKEA is used as an example of the new logic of value. IKEA’s
goal is not to create value for customers but to mobilise customers to create their own value
from the company’s various offerings (see Figure 2.9). IKEA’s strategy is based on cost leadership (high volume production and standardised items) combined with turning consumers
into prosumers, where IKEA’s customers are expected to supply their time for assembly work
after purchase.

Internal linkages
There may be important links between the primary activities. In particular, choices will have
been made about these relationships and how they influence value creation and strategic

capability. For example, a decision to hold high levels of finished stock might ease production scheduling problems and provide a faster response time to the customer. However, it will
probably add to the overall cost of operations. An assessment needs to be made of whether
the added value of extra stock is greater than the added cost. Sub-optimisation of the single
value chain activities should be avoided. It is easy to miss this point in an analysis if, for
example, the marketing activities and operations are assessed separately. The operations may
look good because they are geared to high-volume, low-variety, low-unit-cost production.
However, at the same time the marketing team may be selling quickness, flexibility and variety
to the customers. When put together these two positions representing potential strengths are
weaknesses because they are not in harmony, which is what a value chain requires. The link
between a primary activity and a support activity may be the basis of competitive advantage.

CHAPTER 2 Identification of the firm’s core competences

43

For example, an organisation may have a unique system for procuring materials. Many international hotels and travel companies use their computer systems to provide immediate quotations and bookings worldwide from local access points.

External linkages
One of the key features of most industries is that a single organisation rarely undertakes all value
activities from product design to distribution to the final consumer. There is usually a specialisation of roles, and any single organisation usually participates in the wider value system, which
creates a product or service. In understanding how value is created, it is not enough to look at
the firm’s internal value chain alone. Much of the value creation will occur in the supply and
distribution chains, and this whole process needs to be analysed and understood.
Suppliers have value chains (upstream value) that create and deliver the purchased inputs
used in a firm’s chain. Suppliers not only deliver a product, but also can influence a firm’s
performance in many other ways. For example, Benetton, the Italian fashion company,
managed to sustain an elaborate network of suppliers, agents and independent retail outlets
as the basis of its rapid and successful international development during the 1970s and 1980s.
In addition, products pass through the value chain channels (channel value) on their way to
the buyer. Channels perform additional activities that affect the buyer and influence the firm’s
own activities. A firm’s product eventually becomes part of its buyer’s value chain. The ultimate
basis for differentiation is a firm and its product’s role in the buyer’s value chain, which determines the buyer’s needs. Gaining and sustaining competitive advantage depends on understanding not only a firm’s value chain, but how the firm fits into the overall value system.
There are often circumstances where the overall cost can be reduced (or value increased)
by collaborative arrangements between different organisations in the value system. It will be
seen in Chapter 9 that this is often the rationale behind joint ventures (e.g. sharing technology
in the international motor manufacture and electronics industries).

Customer value proposition (CVP)
Customer value
proposition
The sum of benefits
offered to the target
customers, relative to the
price charged. In order
to be a market leader
this relationship must be
better than competitors’
offers.

The successful company will try to find a way to create value for its customers – that is, a way
to help customers to solve a problem or get an important job done (Johnson et al., 2008).
Once we understand the ‘job’ and all its dimensions, including the full process for how to get
it done, we can design the offering (= customer value proposition).
A conventional view of the value proposition is provided by Knox et al. (2003) in their
review of approaches to customer relationship management. They say a value proposition is:
an offer defined in terms of the target customers, the benefits offered to these customers, and
the price charged relative to the competition.

In other words, the role of value propositions is to ask the fundamental question ‘What business are we in?’ from a customer perspective. It places the ‘Who is the customer?’ together with
the ‘What are the product and service attributes?’ that can not only satisfy current demand but
also address latent demand. However, some branding advocates believe that the value proposition is more than the sum of product features, prices and benefits. They argue that it also
encompasses the totality of the experience that the customer has when selecting, purchasing and
using the product. These customer experiences and also the service quality are very important
elements in the process of designing the CVP. For example, Molineux (2002) states that:
the value proposition describes the total customer experience with the firm and in its alliance
partners over time, rather than [being limited to] that communicated at the point of sale.

+ Indirect costs
Indirect costs for customer (customer participation
in achieving the benefits):
Conversation/negotiation with the supplier
(transaction costs)
Internal costs (administration, etc. in order to get
the product to work)
Long lead time from suppliers resulting in necessary
increased inventory of materials and final products
Service costs
Installation costs

Perceived value is the relation between the benefits customers realise from using the product/
service and the costs (direct and indirect) they incur in finding, acquiring and using it
(see Figure 2.10). The higher this relationship is, the better the perceived value for the customer.
Please do not think of Figure 2.10 as a mathematical formula for calculating an exact
measure of customer-perceived value (CPV). Instead, think of it as what the customer gets
compared to what the customer gives in order to be able to use or consume the product or
service. Hopefully this relationship (CPV = ‘get’/‘give’) is higher than 1. Then real customerperceived value (CPV) has been created. After the product or service has been purchased and
is used or consumed, the level of the customer’s satisfaction can be evaluated. If the actual
customer satisfaction with the purchase and quality exceeds initial expectations, then the
customer will tend to buy the product or service again and the customer may become loyal
towards the company’s product or service (brand loyalty).
The components driving customer benefits include product values, service values, technical values and commitment value. The components driving costs fall into two categories:
those that relate to the price paid and those representing the internal costs incurred by the
customer. These components can be unbundled into salient attributes. Commitment to value,
for example, includes investment in personnel and customer relations. Internal costs might
reflect set-up time and expense, maintenance, training and energy.
If the benefits exceed the costs then a customer will at least consider purchasing your
product. For example, the value to an industrial customer may be represented by the rate of
return earned on the purchase of a new piece of equipment. If the cost reductions or revenue
enhancements generated by the equipment justify the purchase price and operating costs
of the equipment through an acceptable return on investment, then value has been created.
Customer value is thus defined either by the cost reductions that the product can provide in

CHAPTER 2 Identification of the firm’s core competences

45

the customer’s activities or by the performance improvements that the customer can gain by
using the product. Porter’s generic strategies of cost or differentiation (1980) are aimed at
improving either the cost or value of a product relative to the average of the industry.
When we talk about customer value we should be aware that the customer value is not only
being created by the company itself. Sometimes customer value is created in a co-creation
process with customers or suppliers (Grönroos, 2009), or even with complementors and/or
competitors. This extended version of ‘customer value creation’ leads us to the concept of the
value net, which is introduced in section 6.2.

Natural resource extraction (i.e., ore mining and rubber plantations), raw material fabrication (i.e., steel foundries and
tyre manufacturers) and industrial parts manufacturing are the supplier links in the value chain. Customer links include
military and non-military ground equipment manufacturing. These downstream manufacturers use the axle systems
as components of the equipment, such as welding trailers, airport baggage handling trailers, golf carts and tractors.
Source: Adapted from Donelan and Kaplan, 1998.

Perception
The process by which
people select, organise
and interpret sensory
stimulation into a
meaningful picture of the
world.

Understanding customers’ perceptions of value is key to this part of the process and is
where many companies fall down. Too often, management determines what it believes the
customer wants, develops and makes the product, then adds up the costs of production and
puts a standard margin on top of that. The major problems with this approach are that the
product may not effectively address changing customer needs and the price may be too high
for created customer value.
Value-driven companies spend enough time with customers to obtain a fundamental
understanding of their customers’ businesses and of their current and latent needs. They
want to understand which product features really provide customer benefits, and which ones
are merely going to add to the product cost without giving customers any additional reason
to buy. They also determine the price that will deliver value to their customers early in the
product development process. From that, they deduct their target profit and give their engineers and operations people firm targets for the cost of the final product or its components.

Superior value
Delivering value may not be enough to achieve competitive advantage. Excellent quality is no
advantage if your competitors all have similar offerings. Competitive advantage requires that
the value of your product or service is superior to that of your competitors. The major challenge here is that your competitors are providing a moving target by continuously improving
the value they provide.
Competitive advantage can be accomplished by providing the greatest level of benefits
through a differentiation strategy. It can also be accomplished by enabling a customer to
achieve the ‘lowest life cycle cost’ compared to comparable products. It is important to recognise that lowest life cycle cost does not require the lowest purchase price. Lowest life cycle
cost can be achieved by helping the customer reduce start-up, training or maintenance costs.

Value creation and value capture

Value creation
The total range of
benefits that are provided
for customers who will
find them consistently
useful.
Value capture
The part of the ‘value
creation’ that is kept for
the company itself as net
profit. It is influenced
by bargaining power of
buyer and seller.

A business model defines the way a company generates perceived value for customers (value creation) and how it captures some of this value as profit (value capture). Value creation expresses the
benefits the company creates for its customers, similar to the customer perceived value (CPV)
illustrated in Figure 2.10. Customer perceived value is created if ‘get’/‘give’ is bigger than 1.
As corporate practice demonstrates, the development of a sustainable and profitable business model is very challenging. In this connection, value creation and value capture are
two key tasks to consider. Four broad positions, each depicting a particular combination of
value creation and value capture, are illustrated in Figure 2.12.
In the following, the four different positions are briefly explained:
1 Nightmare: in this position, companies are creating CPV for the customers but are not able

to turn a part of the value creation into profit. All the total added value goes to the customers. The reason for this is normally poor revenue logic. Poor revenue logic is the problem for
online companies such as Skype and Spotify. Millions of people are users of their services,
and users feel that these brands deliver great value for them, but too few users are actually
customers who pay for the products. For most users it is enough with the ‘Freemium’ model.
2 Hell: companies that neither create enough value for customers nor develop a functioning
value creation system are doomed for failure. Fiat in Italy could be an example of this. The

Shared value
Creating economic value
not only for the company
itself but also for the
society by addressing its
needs and challenges.
It is about connecting
company success with
social progress in society.

car company’s products and its value positions were not competitive enough and, as a consequence, Fiat lost market share – even in Italy, where its market share fell from around
60 per cent in 1985 to 30 per cent in 2013.
3 Fantasy: in this position, the company does not create much value for its customers but it
still remains a profitable firm. Examples of this position are energy utility (half-public) companies, which often score poorly on customer perceived value (value creation), but remain
profitable because of the monopoly market position and the lack of choice for customers.
4 Heaven: in this position, the company has a sustainable and profitable business model that
scores high, both on perceived customer value (value creation) and on value capture. ­Apple
and Nespresso are good examples. Apple has succeeded in developing its brand perception
as being the coolest smartphone brand in the world market. Nespresso’s revenue logic is built
on the so-called ‘Gillette’ model (razor-blade model). High-quality coffee machines in elegant design are sold for a cheap price through licensing partners. Nespresso does not make
any profit on its coffee machines. Instead, the high profits are earned on the Nespresso capsule sales, where the gross margins are estimated to be around 85 per cent, compared with
around 40 per cent for regular ground coffee (Matzler et al., 2013). A second component of
­Nespresso’s revenue model is the cross-selling of coffee accessories (coffee cups, sugar sachets,
amaretti biscuits, cocoa powder for milk-based recipes, etc.). Furthermore, for the bigger
­Nespresso machines in cafés, Nespresso also provides complete on-site service maintenance of
the coffee machines to ensure that the cafés always provide the best coffee for their customers.
In order to get to the ‘Heaven’ position it is not enough just to sell coffee in capsules, as in the
case of Nespresso; this idea may be copied very quickly by competitors. What is hard to copy
is the entire system – the complete business model – which is the unique foundation for a
sustained and profitable operation.
A growing number of companies realise that it is not enough to look at ‘value capture’
in terms of optimising short-term financial performance. According to Porter and Kramer
(2011), companies must take the lead in bringing business and society together. The solution lies in the principle of shared value, which involves creating value also for society by
addressing its needs and challenges, e.g. by reducing the company’s energy consumption but
at the same time also reducing the CO2 emissions to the athmosphere.

2.6

Value shop and the ‘service value chain’
Michael Porter’s value chain model claims to identify the sequence of key generic activities that businesses perform in order to generate value for customers. Since its introduction in 1985, this model has dominated the thinking of business executives. Yet a growing

48

PART I Assessing the competitiveness of the firm (internal)

Value shop
A model for solving
problems in a service
environment, similar
to workshops. Value is
created by mobilising
resources and deploying
them to solve a specific
customer problem.
Value network
The formation of several
firms’ value chains into
a network, where each
company contributes a
small part to the total
value chain.

number of services businesses, including banks, hospitals, insurance companies, business
consulting services and telecommunications companies, have found that the traditional
value chain model does not fit the reality of their service industry sectors. Stabell and
Fjeldstad (1998) identified two new models of value creation – value shops and value
networks. Fjeldstad and Stabell argue that the value chain is a model for making products,
while the value shop is a model for solving customer or client problems in a service environment. The value network is a model for mediating exchanges between customers. Each
model utilises a different set of core activities to create and deliver distinct forms of value
to customers.
The main differences between the two types of value chains are illustrated in Table 2.2.
Value shops (as in workshops, not retail stores) create value by mobilising resources (e.g.
people, knowledge and skills) and deploying them to solve specific problems such as curing
an illness, delivering airline services to the passengers or delivering a solution to a business
problem. Shops are organised around making and executing decisions – identifying and
assessing problems or opportunities, developing alternative solutions or approaches, choosing

Value creation through transformation of inputs
(raw material and components) to products.

Value creation through customer problem solving. Value is
created by mobilising resources and activities to resolve a
particular and unique customer problem. Customer value is
not related to the solution itself but to the value of solving the
problem.

Sequential process (‘first we develop the product, then
we ­produce it, and finally we sell it’).

Cyclical and iterative process.

Support functions: Firm infrastructure
Human resource
management

R&D

Production Marketing

Sales
and
services

Problem
finding and
acquisition

Problem
solving
Choice

Control and
evaluation

Execution

Support functions: Technology development
Procurement (buying)

The traditional value chain consists of primary and
support activities. Primary activities are directly involved
in creating and bringing value to customers: upstream
activities (product development and production) and
downstream activities (marketing and sales and
service). Support activities that enable and improve the
performance of the primary activities are procurement,
­technology development, human resource management
and firm infrastructure.

The primary activities of a value shop are:
1 Problem finding: activities associated with the recording,
reviewing and formulating of the problem to be solved
and choosing the overall approach to solving the problem.
2 Problem solving: activities associated with generating and
evaluating alternative solutions.
3 Choice: activities associated with choosing among
alternative problem solutions.
4 Execution: activities associated with communicating,
organising and implementing the chosen solution.
5 Control and evaluation: activities associated with
measuring and evaluating to what extent implementation
has solved the initial situation.

Examples: production and sale of furniture, consumer food
products, electronic products and other mass products.

one, executing it and evaluating the results. This model applies to most service-orientated
organisations, such as building contractors, consultancies and legal organisations. However,
it also applies to organisations that are primarily configured to identify and exploit specific
market opportunities, such as developing a new drug, drilling a potential oilfield or designing
a new aircraft.
Different parts of a typical business may exhibit characteristics of different configurations.
For example, production and distribution may resemble a value chain, and research and
development a value shop.
Value shops make use of specialised knowledge-based systems to support the task of
creating solutions to problems. However, the challenge is to provide an integrated set of
applications that enable seamless execution across the entire problem-solving or opportunity-exploitation process. Several key technologies and applications are emerging in value
shops – many of which focus on utilising people and knowledge better. Groupware, intranets,
desktop video conferencing and shared electronic workspaces enhance communication and
collaboration between people – essential to mobilising people and knowledge across value
shops. Integrating project planning with execution is proving crucial – for example, in pharmaceutical development, where bringing a new drug through the long, complex approval
process a few months early can mean millions of dollars in revenue. Technologies such as
inference engines and neural networks can help to make knowledge about problems and the
process for solving them explicit and accessible.
The term ‘value network’ is widely used. Most often it refers to a group of companies, each
specialising in one piece of the value chain and linked together in some virtual way to create
and deliver products and services.
Some of the most IT-intensive businesses in the world are value networks – banks, airlines
and telecommunications companies, which core services are typically being supplemented by
other value network partners. Most of their technology provides the basic infrastructure of
the ‘network’ to mediate exchanges between customers. But the competitive landscape is now
shifting beyond automation and efficient transaction processing to monitoring and exploiting
information about customer behaviour. The purpose of that is to add more value to customer
exchanges through better understanding of usage patterns, exchange opportunities, shared
interests and so on. Data mining and visualisation tools, for example, can be used as tools to
identify both positive and negative connections between customers.
Competitive success often depends on more than simply performing your primary model
well. It may also require the delivery of additional kinds of complementary value. Adopting
attributes of a second value configuration model can be a powerful way to differentiate your
value proposition or defend it against competitors pursuing a value model different to your
own. It is essential, however, to pursue another model only in ways that leverage the primary
model. For example, Harley-Davidson’s primary model is the chain – it makes and sells products. Forming the Harley Owners Group (HOG) – a network of customers – added value to
the primary model by reinforcing the brand identity, building loyalty and providing valuable
information and feedback about customers’ behaviours and preferences (see Case study 12.1).
Amazon.com is a value chain like other book distributors, and initially used technology to
make the process vastly more efficient. Now, with its book recommendations and special
interest groups, it is adding the characteristics of a value network. Our research suggests that
the value network in particular offers opportunities for many existing businesses to add more
value to their customers, and for new entrants to capture market share from those who offer
less value to their customers.

Combining the ‘product value chain’ and the ‘service value chain’
Blomstermo et al. (2006) make a distinction between hard and soft services. Hard services are
those where production and consumption can be decoupled. For example, software services
can be transferred into a CD, or some other tangible medium, which can be mass-produced,
making standardisation possible. With soft services, where production and consumption

occur simultaneously, the customer acts as a co-producer, and decoupling is not viable.
The soft-service provider must be present abroad from its first day of foreign operations.
Figure 2.13 is mainly valid for soft services, but at the same time in more and more industries
we see that physical products and services are combined.
Most product companies offer services to protect or enhance the value of their product businesses. Cisco, for instance, built its installation, maintenance and network-design service business to ensure high-quality product support and to strengthen relationships with enterprise and
telecom customers. A company may also find itself drawn into services when it realises that
competitors use its products to offer services of value. If it does nothing, it risks not only the
commoditisation of its own products – something that is occurring in most product markets,
irrespective of the services on offer – but also the loss of customer relationships. To make
existing service groups profitable – or to succeed in launching a new embedded service business – executives of product companies must decide whether the primary focus of service units
should be to support existing product businesses or to grow as a new and independent platform.
When a company chooses a business design for delivering embedded services to customers,
it should remember that its strategic intent affects which elements of the delivery life cycle are
most important. If the aim is to protect or enhance the value of a product, the company should
integrate the system for delivering it and the associated services in order to promote the development of product designs that simplify the task of service (e.g., by using fewer subsystems
or integrating diagnostic software). This approach involves minimising the footprint of service
delivery and incorporating support into the product whenever possible. However, if the
company wants the service business to be an independent growth platform, it should focus
most of its delivery efforts on constantly reducing unit costs and making the services more
productive (Auguste et al., 2006).

CHAPTER 2 Identification of the firm’s core competences

51

In the ‘moment of truth’ (e.g., in a consultancy service situation), the seller represents all
the functions of the focal company’s ‘product’ and ‘service’ value chain – at the same time.
The seller (the product and service provider) and the buyer create a service in an interaction
process: ‘The service is being created and consumed as it is produced.’ Good representatives
on the seller’s side are vital to service brands’ successes, being ultimately responsible for delivering the seller’s promise. As such, a shared understanding of the service brand’s values needs
to be anchored in their minds and hearts to encourage brand-supporting behaviour. This
internal brand-building process becomes more challenging as service brands expand internationally, drawing on workers from different global domains.
Figure 2.13 also shows the cyclic nature of the service interaction (‘moment of truth’)
where the post-evaluation of the service value chain gives input for the possible redesign of
the ‘product value chain’. The interaction shown in Figure 2.13 could also be an illustration
or a snapshot of a negotiation process between seller and buyer, where the seller represents
a branded company that is selling its projects as a combination of ‘hardware’ (physical products) and ‘software’ (services). Furthermore, it is important to realise that buyers are increasingly active co-creators of value (Vargo and Lusch, 2008).
Certainly one of the purposes of the ‘learning nature’ of the overall decision cycle in
Figure 2.13 is to pick up the ‘best practices’ among different kinds of international buyer–
seller interactions. This would lead to implications for a better set-up of:
●
●
●

2.7

the ‘service value chain’ (value shop)
the ‘product value chain’
the combination of the service and product value chains.

Internationalising the value chain
International configuration and coordination of activities

Glocalisation
The development and
selling of products or
services intended for
the global market, but
adapted to suit local
culture and behaviour.
(Think globally but act
locally.)
Diffusion
The spread of a new
product through society.

All internationally orientated firms must consider an eventual internationalisation of the value
chain’s functions. The firm must decide whether the responsibility for the single value chain function is to be moved to the international markets or is best handled centrally from head office. Principally, the value chain function should be carried out where there is the highest competence (and
the most cost-effectiveness), and this is not necessarily at head office (Bellin and Pham, 2007).
The two extremes in ‘global marketing’ (globalisation and localisation) can be combined
into the so-called ‘glocalisation’ framework, as shown in Figure 2.14.
This global marketing strategy strives to achieve the slogan ‘Think globally but act locally’
(the so-called ‘glocalisation’ framework), through dynamic interdependence between headquarters and subsidiaries. Organisations following such a strategy coordinate their efforts,
ensuring local flexibility while exploiting the benefits of global integration and efficiencies,
as well as ensuring worldwide diffusion of innovation. A key element in knowledge management is the continuous learning from experiences. In practical terms, the aim of knowledge
management as a learning-focused activity across borders is to keep track of valuable capabilities used in one market that could be used elsewhere (in other geographic markets), so that
firms can continually update their knowledge. However, knowledge developed and used in
one cultural context is not always easily transferred to another. The lack of personal relationships, the absence of trust and ‘cultural distance’ all conspire to create resistance, friction and
misunderstandings in cross-cultural knowledge management.
With globalisation becoming a centrepiece in the business strategy of many firms – be they
engaged in product development or providing services – the ability to manage the ‘global knowledge engine’ to achieve a competitive edge in today’s knowledge-intensive economy is one of the
keys to sustainable competitiveness. But in the context of global marketing, the management of
knowledge is de facto a cross-cultural activity, whose key task is to foster and continually upgrade

52

PART I Assessing the competitiveness of the firm (internal)

Global marketing strategies
Globalisation
(Standardisation)

Localisation
(Differentiation)

100%

100%

Global low-cost
production and
selling

Culturally close
to consumer

GLOCAL

Global roll-out
of concepts/
high speed

(Global + Local)

Flexible response
to local customer
needs
Regional
and local market
penetration

collaborative cross-cultural learning. Of course, the kind and/or type of knowledge that is strategic for an organisation and that needs to be managed for competitiveness varies depending on
the business context and the value of different types of knowledge associated with it.
A distinction immediately arises between the activities labelled on Figure 2.6 as downstream
and those labelled as upstream activities. The location of downstream activities, those more related
to the buyer, is usually tied to where the buyer is located. If a firm is going to sell in Australia, for
example, it must usually provide service in Australia, and it must have salespeople stationed in
Australia. In some industries it is possible to have a single salesforce that travels to the buyer’s
country and back again; other specific downstream activities, such as the production of advertising copy, can sometimes also be performed centrally. More typically, however, the firm must
locate the capability to perform downstream activities in each of the countries in which it operates.
In contrast, upstream activities and support activities are more independent of where the buyer is
located (see Figure 2.15). However, if the export markets are culturally close to the home market,
it may be relevant to control the entire value chain from head office (the home market).

CHAPTER 2 Identification of the firm’s core competences

53

This distinction carries some interesting implications. First, downstream activities create
competitive advantages that are largely country-specific: a firm’s reputation, brand name
and service network in a country grow largely out of its activities and create entry/mobility
barriers largely in that country alone. Competitive advantage in upstream and support activities often grows more out of the entire system of countries in which a firm competes than
from its position in any single country.
Second, in industries where downstream activities or other buyer-tied activities are vital to
competitive advantage, there tends to be a more multi-domestic pattern of international competition. In many service industries, for example, not only downstream activities but frequently
upstream activities are tied to buyer location, and global strategies are comparatively less
common. In industries where upstream and support activities, such as technology development
and operations, are crucial to competitive advantage, global competition is more common. For
example, there may be a large need in firms to centralise and coordinate the production function
worldwide to be able to create rational production units that are able to exploit economies of scale.
Furthermore, as customers increasingly join regional cooperative buying organisations, it
is becoming more and more difficult to sustain a price differentiation across markets. This will
put pressure on the firm to coordinate a European price policy.
The distinctive issues of international strategies, in contrast to domestic, can be summarised
in two key dimensions of how a firm competes internationally. The first is called the configuration
of a firm’s worldwide activities, or the location in the world where each activity in the value
chain is performed, including the number of places. For example, a company can locate different
parts of its value chain in different places – for instance, factories in China, call centres in India
and retail shops in Europe. IBM is an example of a company that exploits wage differentials
by increasing the number of employees in India from 9,000 in 2004 to 50,000 by 2007, and
topping with 130,000 in 2014. Most of these employees are in IBM Global Services, the part of
the company that is growing fastest but has the lowest margins – which the Indian employees
are supposed to improve by reducing (wage) costs rather than raising the prices (Nadhe, 2014).
The second dimension is called coordination, which refers to how identical or linked activities
performed in different countries are coordinated with each other (Porter, 1986; Sanchez, 2007).

2.8

The virtual value chain
By introducing the virtual value chain, Rayport and Sviokla (1996) have extended the conventional value chain model, which treats information as a supporting element in the valueadding process (see Figure 2.16).
Each of the physical value chain activities might make use of one or all four of the information processing stages of the virtual value chain, in order to create extra value for the
customer. That is the reason for the horizontal double arrows (in Figure 2.16) between the
different physical and virtual value chain activities.
In this way (in relation to Figure 2.16), information can be captured at all stages of the
physical value chain. Obviously such information can be used to improve performance at
each stage of the physical value chain and to coordinate across it. However, it can also be
analysed and repackaged to build content-based products or to create a new line of business.
A company can use its information to reach out to other companies’ customers or operations, thereby rearranging the value system of an industry. The result might be that traditional
industry sector boundaries disappear. The CEO of Amazon.com, Jeffrey P. Bezos, clearly sees
his business as not bookselling, but the information-broker business.

Online customer value proposition (OCVP)
Regarding the customer value proposition that can be created along the virtual value chain, it
is very important to develop a profound understanding of the customer’s online experience.

54

PART I Assessing the competitiveness of the firm (internal)

Physical value chain

R&D

Production

Marketing

Sales &
service

Value

Define
information
problem

Organise,
select and
gather
information

Synthesise
information

Distribute
information

Value

Virtual value chain

Figure 2.16 The virtual value chain as a supplement to the physical value chain

Marketers must understand specific characteristics of online channels and the benefits they
offer to customers. To help formulate the online customer value proposition (OCVP), we need
to consider the special characteristics of the Internet and its online services as perceived by
customers using them. Six criteria can be used to determine the sustainability of the formulated OCVP, in order to reach online customers (Chaffey, 2005):
1 Content: online content is rich, which means it provides something that other channels

Customisation
Making something
(product/service)
according to a customer’s
individual requirements.

2

3

4

5

6

cannot. Often this means more detailed, in-depth information to support the buying process or product usage. However, often online product catalogues simply replicate what is
in offline catalogues without adding extra information, images or example applications.
Messaging through email and SMS is also key to providing unique content – these media
can be used to deliver timely, relevant media to individuals. As well as text-based content,
which is king for business-to-business, there is also interactive content, which is king for
consumer sites and particularly brands. FMCG brands now use the Internet to deliver what
they term as ‘digital assets’, which support offline branding campaigns.
Customisation: in this case, mass-customisation of content (whether received as website
pages or email alerts) and commonly known as ‘personalisation’. Of course, Amazon is
quoted many times as an example of this, and it actually has a ‘Director of Personalisation’.
The ability for a subscriber to an online email service to tailor their messages by selectively
opting-in to particular types of message is a further example of customisation.
Community: these days this is also known as ‘social networks’. Online channels such as the
Internet are known as ‘many-to-many’ media, meaning that your audiences can contribute
to the content.
Convenience: this is the ability to select and purchase, and in some cases use, products
from your desktop at any time: the classic 24/7/365 availability of a service. Online usage
of products is, of course, restricted to digital products such as music or other data services.
Amazon has advertised offline using a cartoon showing a Christmas shopper battling in
queues clutching several bags, to reinforce the convenience message.
Choice: the Internet gives a wider choice of products and suppliers than via conventional
distribution channels. For example, Tesco.com provides Tesco with a platform to give
consumers a wider choice of products (financial, travel, white goods) with more detailed
­information than is physically available in store.
Cost reduction: the Internet is widely perceived as a relatively low-cost place of purchase.
A key component of the low-cost airline carriers’ OCVP is that it is cheaper than phone
­bookings. This simple price differential, together with the limited change behaviour
­required from phone booking to online booking, has been a key factor in, for example,
Ryanair’s online ticketing channel effectively replacing all other booking modes.

CHAPTER 2 Identification of the firm’s core competences

Experiential marketing

Degree of intensity/connection

High
(differentiated)
Degree of differentiation

Customer experience
When a company
intentionally uses
products in combination
with services to engage
the individual customer
in a way that creates
a memorable event,
which can characterised
in one of four groups:
entertainment,
educational, aesthetic or
escapist.

The previous section describes and explains value creation as a result of both the product
and service offering. However, as services increasingly become commoditised – think of
smartphone services sold solely on price – ‘experiences’ have emerged as the next step
in how we can provide ‘customer value’. This process of generating customer value from
product solutions, services and finally to customer experiences is shown in Figure 2.17.
A customer experience occurs when a company intentionally uses products in combination
with ­services to engage an individual customer in a way that creates a memorable event (Pine
and Gilmore, 1998).
Unless companies want to be in a commoditised business, they will be compelled to
upgrade their offerings to the next stage of customer value creation: ‘customer experience’.
Experiential marketing is a growing trend worldwide, evident in most sectors of the global
economy. Essentially it describes marketing initiatives that give consumers in-depth, tangible
experiences in order to provide them with sufficient information to make a purchase decision.
It has evolved as a response to a perceived transition from a service economy to one personified by the experiences in which consumers participate.
Increasingly, consumers are involved in the processes of both defining and creating value,
and the co-created experience of consumers through the holistic brand value structure
becomes the very basis of marketing.

Pine and Gilmore (1998) suggest that we think about experiences across two bi-polar
constructs:
Involvement/participation: This dimension refers to the level of interactivity between the supplier and the customer. At a ‘low degree’ lies passive participation, where the participants
experience the event as observers or listeners. Such participants include classic symphony
goers. At the other end of the spectrum lies ‘active participation’, in which customers play
key roles in creating the performance or event. Such participants could be joining a rock
concert.
Intensity/connection: This dimension refers to the perception of the strength of feeling towards the interaction. Watching a film at the theatre (e.g. IMAX Theatre) with an audience
and 3D screen and advanced sound is associated with a ‘high degree’ of intensity/connection compared to watching the same film at home on a DVD.
We can sort experiences into four broad categories, according to where they fall along the
spectra of the two dimensions:
1 Entertainment: entertainment can be defined as something that amuses, pleases, or di-

verts (especially a performance or show), or as the pleasure afforded by being entertained
and amused. For example, fashion shows at designer boutiques and upmarket department
stores usually involve a low degree of customer involvement and intensiveness.
2 Educational: activities in the educational zone involve those where participants are more
actively involved, but the level of intensiveness is still low. In this zone, participants acquire
new skills or increase those they already have. Many company offerings include educational
dimensions. For example, cruise ships often employ well-known authorities to provide
semi-formal lectures about their itineraries – a concept commonly referred to as ‘edutainment’. Likewise, the Ferrari Driving Experience is a two-day programme that is designed
to narrow the gap between driving ability and a Ferrari’s performance capability (Atwal
and Williams, 2009). This type of experience typically involves active participation by the
consumer in educational activities of a stimulating nature, thus ensuring that the event
enhances an experience.
3 Aesthetic: when the element of activity is reduced to a more passive involvement in nature, the event becomes aesthetic. A high degree of intensiveness is clearly evident within
this activity but has little effect on its environment, such as admiring the architectural or
interior design of designer boutiques. Here the customers are involved in a very intense
experience (such as a tourist viewing the Grand Canyon from its rim) but they are not
personally involved in the event (i.e., not climbing down the Grand Canyon, as would be
the case with escapism). Luxury brand activity is of an aesthetic nature, with customers
immersing themselves in the experience but with little active participation. The experience
of watching a Cirque du Soleil show is similar to this kind of customer experience.
4 Escapism: Escapism can be defined as a tendency to escape from daily realities or routines
by indulging in daydreams, fantasies, or entertainment that provides a break from reality.
Escapist activities are those that involve a high degree of both involvement and intensiveness, and are clearly a central feature of much of luxury consumption or life style
experiences connected to the fitness trend. This is clearly evident within the luxury
tourism and hospitality sector, characterised by the growth of specialised holiday offerings, where the customers are intensively involved with co-creating the customer
experiences. The experience of joining a Zumba dance course is similar to this kind of
customer experience.
In conclusion, whereas traditional marketing frameworks view consumers as rational decision
makers, focused on the functional features and benefits of products, experiential marketing
views consumers as emotional beings, focused on achieving memorable experiences. In this
connection the use of new technologies, such as social media, have also aided the potential for
experiential marketing. This is of particular relevance given the increasing significance of the
Internet as a communication and distribution channel within the luxury sector.

CHAPTER 2 Identification of the firm’s core competences

57

Finally, the more a company engages all five senses in the creation of a ‘customer experience’, the more effective and memorable it can be.

The way in which augmented reality (AR) has been used in marketing campaigns can be
seen as a form of experiential marketing because it focuses not only on a single product/
service, but also on an entire experience created for the customers. The technology enhances
the customer’s current perception of reality. By contrast, virtual reality replaces the real world
with a simulated one. With the help of advanced AR the information about the surrounding
real world of the user becomes interactive and digitally manipulatable.
The importance of experiential marketing is recognised as a means of creating value for
the end consumer, who will be motivated to make faster and more positive purchasing decisions (see also Exhibit 2.4). Consequently, AR experimental marketing will be considered
to affect mainly the pre-purchase stage due to the fact that AR has the most impact at the
pre-purchase stage. At this stage the consumer is evaluating their choices before taking
the final purchase decision, and AR has the power to ‘put the product in the hands of the
users’ – giving them the opportunity to test the product as if they already owned it. Furthermore, AR has the potential to provide customers with an experience they appreciate and
will tell their friends about.

EXHIBIT 2.4
IKEA’s use of AR
In its 2014 catalogue, IKEA has produced an interactive online element based on AR, in which viewers can actually see
a piece of furniture in their home before buying it. Viewers can accelerate their decision making by easily dragging
an item from the catalogue and placing it anywhere in the simulated space on their smartphone or tablet screen, and
then immediately taking a screenshot of that selection. Such technology allows for more personally interactive catalogues and enhances playfulness and convenience, as well as stimulates consumers’ buying intentions and impressions
of a brand.

Source: IKEA Ltd.

58

PART I Assessing the competitiveness of the firm (internal)

2.10

Summary
A business model defines the way a company generates perceived value for customers (value
creation) and how it captures some of this value as profit (value capture). In order to create
value for customers, resources, capabilities and competences are needed in the organisation.
Competences are the skills, knowledge and technologies that an organisation possesses
and on which its success depends. Although an organisation will need to reach a threshold
level of competence in all its activities, it is likely that only some of these activities are core
competences. These core competences underpin the ability of the organisation to outperform
the competition and therefore must be defended and nurtured. Core competences concern
those resources that are fundamental to a company’s strategic position.
In this chapter, three basic perspectives on identification of core competences have been
presented:
●
●
●

The RBV emphasises the importance of firm-specific assets and knowledge. The underlying
approach of the RBV is to see the firm as a bundle of tangible and intangible resources, and to
see some of these resources as costly to copy and trade. A firm’s resource position can lead to
sustained competitive advantage.
Especially in knowledge-intensive firms, distinctive capabilities consist of intangible
resources. In contrast to the MOV, which takes the environment as the critical factor determining an organisation’s strategy, the RBV assumes that the key factors for success lie within
the firm itself in terms of its resources, capabilities and competences. The choice of the firm’s
strategy is not dictated by the constraints of the environment but is influenced more by calculations of how the organisation can best exploit its core competence relative to the opportunities in the external environment.
The MOV is basically about adapting to the market environment by concentrating mainly
on customers and their needs.
The VBV integrates elements of both the RBV and the MOV, but it does so without
ignoring the costs of performing the activities. The value chain provides a systematic means
of displaying and categorising activities. Value activities can be divided in different ways:
●
●

primary and support activities;
upstream and downstream activities.

At each stage of the value chain the firm seeks to add value and thus compete with its rivals.
The simplified version of the value chain used throughout this text contains only the primary
activities of the firm. The value chain is not a collection of independent activities but a system
of interdependent activities. The firm’s value chain activities are also related to other actors’
value chains. Competitive advantages are created if the firm can:
●
●

Today, the right combination of the product value chain and the service value chain is not
a sufficient competitive differentiator. Adding ‘customer experiences’ and ‘experiential
marketing’ occurs when a company intentionally uses products in combination with services
to engage individual customers in a way that creates a memorable event, which can characterised in one of four groups: entertainment, educational, aesthetic or escapist.
Engaging the customer and adding customer experiences is further exemplified by the use
of augmented reality (AR), which is a digital way of putting the product in the hands of the
users and giving them the opportunity to test the product without paying for it. Consequently,
AR is especially effective in the pre-purchase stage of the buying process.

Zalando is an Internet retailer of branded clothing and
footwear for men, women and children. The company
operates in the standard and premium segments, offering
a wide range of products. It is expanding the number
of exclusive brands offered by the www.zalando.com
Internet shop.
Zalando GmbH was established in Germany by Robert
Gentz and David Schneider in 2008. The company is
headquartered in Berlin and has operated so far only in
e-commerce. A customer service hotline and free delivery
and free return of goods are offered.
Eighty per cent of Zalando’s customers are women.
Zalando’s target customer group is women aged 20–40.
Swedish investment company Kinnevik is the biggest
shareholder, with about 37 per cent ownership of Zalando.

The Zalando UK website
Source: www.zalando.co.uk

History
2008: Zalando is founded in Germany
2009: The company starts delivering to Austria
2010: Launch of French and Dutch retail websites in France
and the Netherlands
2011: Launch in the UK, Italy and Switzerland
2012: Launch in Belgium, Spain, Sweden, Denmark, Poland,
Finland and Norway
As of January 2014 Zalando has local websites in the
following 14 countries: Germany, Poland, Denmark, Norway,
Sweden, Finland, Holland, United Kingdom, Belgium,
France, Switzerland, Austria, Italy and Spain.
These countries together offer a population of 400 million
people.

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PART I Assessing the competitiveness of the firm (internal)

Zalando is the largest online footwear shop in Europe,
offering a high number of international brands. Besides
footwear, Zalando distributes women’s and men’s outerwear, underwear, hosiery and clothing accessories, as well
as bags and a number of other product types. In March 2010
Zalando expanded its product range by adding childrenswear. In January 2011 the Internet retailer started to sell
exclusive perfume brands.
Zalando is a rapidly growing company. Its first acquisition took place in May 2010 with the buyout of MyBrands,
an online designer outlet. With the acquisition of MyBrands,
Zalando has broadened its target consumer group and its
range of premium products.
Zalando has increased its brand awareness with the help
of humorous TV spots. Its TV advertising campaign ‘Scream
for joy’ promotes Zalando as simple to shop at. There are
no minimum orders, no mailing costs, and payment is
made either upon receipt of invoice, by pre-payment or by
credit card.
Meanwhile, Zalando has rapidly expanded into new
markets and categories. The Internet ‘shoe-ting’ star is now
active in 14 European countries. The stunning revenue
growth has been fired by massive investment in colourful
TV spots and catchy online banners. It is estimated that
Zalando has spent around €90 million in advertising and
promotion per year.
Zalando has indulged its customer base with fancy store
magazines, which are hardly distinguishable from conventional fashion journals yet are distributed on a complimentary basis. The lead publication, Zalando Magazine, has since
reached a circulation of 1.5 million copies and is distributed in
Germany, Austria, Switzerland, France and Holland. Needless
to say, its content is also published as both e-magazine and
smartphone app, along with numerous animations. Zalando
exploits the potential a cross-media format has to offer.
With its new Zalando Men publication, Zalando seeks to
approach its male audience in Germany. The 68-page magazine, produced in-house, made its debut in August 2012 with
an initial circulation of 250,000 copies in Germany. Planned
to appear bi-annually, distribution takes place as an insert in
mail-delivered packages. In addition, the 36-page lifestyle
magazine, Zalando Wohnen (Zalando At Home) aims at a
predominately female and online-savvy readership in the 25
to 45 age range earning above-average net incomes. With a
nicely balanced mix of journalism and subtle merchandise
touting, the magazine presents offers, rating lists, seasonal
themes, practical tips and recipes.
Another growth engine for Zalando has been the extension of its core shoe offering to include new categories such
as clothing and household accessories, as well as own-label
and designer brands. This enables Zalando to cross-sell and
up-trade, which increases sales per customer. The company
states that non-footwear in 2013 accounted for more than
half of annual revenues.

In December 2010, Zalando opened a Christmas Sales
Lounge in the centre of Berlin. The lounge attracted high
consumer traffic as people sought bargains on branded
clothing and footwear for Christmas. This first foray into
offline retailing generated good revenues for the company.
Up until December 2013, Zalando has invested approximately €150 million in developing its logistics and technological infrastructure. More than €100 million of this went
to equipping the distribution fulfilment centres in Erfurt and
Mönchengladbach, Germany. A new technology hub is also
being established in Dortmund to support the growth.
In July 2012, German TV channel ZDF broadcast a
report on the packing and distribution centre operated for
Zalando by a provider near Berlin. The report stated that
some employees, who often commute more than 200 km
from nearby Poland, were not allowed to sit in certain
departments, and they were only paid €7 per working hour.
Considering the remarkable growth and huge expenditure of the company, some would question how sustainable
a business model Zalando really has. Zalando’s biggest costdrivers, to help answer this question, are:
●

Pre-financing: Just like other trading companies, Zalando
needs to pre-finance all its products. The Berlin company
mass orders stock from a variety of brands to pack its warehouses. If the items prove to be unpopular among the
customers, the shelves are soon full of unwanted products.
It is not surprising, then, that Zalando opened the Zalando
Lounge to create its own shopping club and to boost sales.

●

Warehouse costs: When buying products there is always
the issue of where they will be housed. With four huge
logistical centres in Germany (see Figure 1 below), it is
easy to imagine the complexity of Zalando’s undertakings.

●

Postage costs: As Zalando covers the costs of both postage and returns of items, the shopping giant has high
costs that are most likely reflected in the product prices.
The workforce required to dispatch vast quantities of
products means that Zalando requires a workforce for
three different shifts to ensure the work continues overnight. This is a costly procedure.

●

Returns: An unfortunate fact within the fashion business,
and particularly for online shops, is that people tend to
change their minds. This returns policy is convenient and
a free service for customers. Within normally 30 days
(100 days in Germany), anything can be exchanged or
returned free of charge, no questions asked. And here lies
Zalando’s Achilles heel. Rumours indicate that customers
will order the same shoe model in three sizes, only to
return two of them, or they will return the item after a
single evening’s wear (though that is not sanctioned by
the company of course). Industry speculation is that
Zalando has figures of as high as 70 per cent in returned
merchandise. Zalando refuses to comment on this figure.

Part I CASE STUDy

Phase 1
(2009−2010)

Phase 2
(2011)

Phase 3
(2012−2013)

Großbeeren
(Winter 2010)

Brieselang
(Summer 2011)

Erfurt
(Summer 2012)

Mönchengladbach
(Summer 2013)

First logistics centre
established

First logistics centre
operated by Zalando

First logistics centre built
to Zalando needs

Second large logistics
centre construction

Operated by logistics
partner DocData

30,000 sqm

Designed and operated
by Zalando

Same concept used
as in Erfurt

Largest eCommerce
logistics facility in Europe

Test operations to
start in summer 2013

75,000 sqm (+45,000
sqm expansion ongoing)

75,000 sqm (+45,000
sqm expansion option)

30,000 sqm

61

Logistics centres are located in central locations in Germany, servicing all European countries
Zalando is leasing land and buildings to limit capital investment
Combined capacity of >250,000 sqm operational/in construction (~300,000 sqm including option)

Figure 1 Zalando’s four warehouses (as of end of 2013)

Apparel online (internet) B2C retailing

Zalando shoes
Source: Ulrich Baumgarten/Getty Images.
●

Marketing: From traditional advertising TV spots to
spots on Germany’s Next Top Model, expensive search
engine campaigns and online marketing, Zalando is
sparing no cost in marketing its products. On the plus
side, this advertising saturation has resulted in 60 per
cent of Germany’s population recognising the brand.
The brand awareness in the target group (women of
20–40 years) is as high as 90–95 per cent. On the other
hand, the expenses are enormous.

General market trends in footware and
apparel
Table 1 shows World Bank figures regarding the total GDP,
and GDP per cap.

The Internet has become an important tool for browsing
or researching clothing products, whether the purchase is
eventually made online or in a store (see Tables 2–4).
While the USA saw the highest value growth in apparel
Internet retailing over the 2006–11 period, the e-commerce
channel held the highest share in Taiwan, due to the
number of consumers purchasing clothes from overseas sites and the prevalence of online discounts. Unlike
other trends, the global online sales boom has not been
driven by BRIC economies. BRICs still lag behind in online
apparel. The e-commerce channel’s share was less than
3 per cent in all four BRIC countries in 2011. It is particularly weak in India, where only 10 per cent of the population are Internet users.

Reason for increasing internet
retailing (supply side)
There are numerous underlying reasons for the rise of
Internet retailing on the supply side. However, the fundamental reason why so many retailers set up online store
fronts is that it gives them access to new consumers without
having to invest in costly stores.
But there are other incentives:
1 In some markets, tax is also a huge motivator. Pure-play
Internet retailers in the USA avoid paying sales tax in the
majority of states, giving them a significant advantage
over store-based retailers. The UK and Australia also

have similar tax loopholes available to foreign Internet
retailers.
2 The information from analytics tools available to retailers also gives a major incentive for Internet retail. These

l­ow-cost (or free) tools can give retailers detailed estimates on who is visiting their site, for how long and
where they go next. This is invaluable information that is
unavailable to store-based retailers.

Reason for increasing Internet retailing
(demand side)
The demand for choice and convenience has fuelled the
growing number of online shoppers:
1 With longer working hours, the opportunity to shop at
leisure (24 hours) has drastically diminished. Historically,
this has driven the growth of the hypermarket and convenience store channels. However, this same basic desire
has attracted consumers to the Internet, as all of their
favourite brands are available around the clock.
2 In addition to the sheer variety of products available at
the click of a button, consumers also benefit from the
use of comparative tools. This can be either in the form
of product reviews or price comparison sites.

3 Product reviews reassure the consumer that they are buying the right product for their needs. Price ­comparison
tools have led to the perception that the best price is always found on the Internet. Both these facilities further
encourage consumers to browse online, which gives retailers the opportunity to sell products to them.

General development of the B2C apparel
in different regions in 2012–13
Europe
Across Europe, apparel e-commerce is booming. In the EU,
the share of individuals purchasing clothes and sports goods
online increased in 2012, reaching over 20 per cent of individuals. In Germany, apparel is the largest e-commerce
category, having grown by just under a third in terms of
sales and reaching several EUR billions of sales. Among
the leading players on the market, the Otto Group plans to
launch a new e-commerce fashion project named Collins in
2014, while Zalando more than doubled its apparel online
sales in 2012. Asos and Debenhams were among the most
prominent online shops for online fashion products in the
UK in 2013. In France, nearly a half of Internet users shopped
for clothing online in 2012, with La Redoute, 3 Suisses and
Zalando being the most popular destinations for shopping.

Eastern Europe
In Russia, apparel online sales (clothing and shoes) grew
by over 40 per cent in 2012, and accounted for almost

64

PART I Assessing the competitiveness of the firm (internal)

one fifth of total online value sales. Clothing, shoes and
­accessories became the most popular online product category in 2012, with nearly half of online shoppers making
purchases. Online apparel retailers in Russia have seen
significant increase in revenues, some growing by up to
6 times, with Wildberries, Lamoda, Quelle and KupiVip as
leading online merchants. Several players, such as KupiVip
and Lamoda, attracted large investments from local
venture capitalists and from abroad. Clothing and shoes is
the leading online category in Poland, with a high doubledigit percentage of online shoppers making purchases. The
number of online shops selling clothes in Poland grows
rapidly every year. In Estonia, Croatia, Macedonia and
Turkey, and some other European countries, apparel was
bought by a high percentage of online shoppers, and was
one of the most popular online product categories in these
countries.

North America
In the United States, apparel and accessories was second
only to consumer electronics in terms of total online value
sales. This category is expected to grow by a double-digit
percentage figure in 2013, with the growth continuing but
slowing down throughout 2016. Nevertheless, apparel is
expected to remain the fastest-growing product category in
total online value sales. Players such as Abercrombie & Fitch
compete to increase their share of the booming US online
market for apparel.

South America
In South America, apparel ranks high in popularity for
online shoppers in such countries as Peru, Uruguay and
Venezuela, but is outperformed by electronics. In Brazil,
apparel is the fourth most popular online product category,
purchased by around a third of online shoppers in 2012.
In Mexico this share is less than in Brazil, as apparel falls
behind computers, electronics, books and some other
products and services.

Asian-Pacific
Apparel is the most-purchased product category in online
retailing in Japan. The globally active apparel retailer Gap
Inc. opened an online shop in Japan in autumn 2012,
joining other national and international players. In South
Korea, apparel was the among the highest-selling ­categories

in 2012, growing at a one-digit percentage rate, which is
slightly slower than the total online retailing market, signalling high maturity. In China, fashion and accessories had
the highest reach of online shoppers, amounting to threequarters of females and a high, double-digit share of male
online shoppers. Online apparel sales increased by over 50
per cent to several tens of EUR billions in 2012. Although
C2C remains the largest segment of the online market for
clothing in China, the market share of independent B2C
platforms grows, with large international players, such as
Levi Strauss, Inditex, Macy’s and Asos, launching or planning to launch local online shops. In Australia, apparel was
the second most-purchased product category in online
retailing after electronics in 2012 and is expected to remain
the fastest-growing product category in online retailing
through the next five years.

Middle East and Africa
In the Middle East and Africa, local online fashion stores
attract large investments from established capitalists, indicating a positive view of the market potential. The Middle
Eastern online vendor of clothing, Namshi – a Rocket Internet’s (subsidiary of Kinnevik) project – raised several USD
millions of investment in May 2013, while a South African
online apparel store, Zando, received an even larger sum
from investors such as JP Morgan. Moreover, in South
Africa, the discount sector started to emerge within the
online market for clothing, with apparel discount online
shopping clubs, such as Runway (launched in 2012),
growing rapidly.

Zalando’s financial performance
until now
In the online business big sales often mean high costs.
Thus far, Zalando is a victim of its own success. Marketing
and expansion, free delivery and free returns, as well as
­inventory, IT and logistics costs have all weighed heavily on
­Zalando’s bottom line – see Table 5.
The sales of shoes accounts for 50 per cent of ­Zalando’s
total turnover; the remaining sales are mostly within
clothing. Fifty per cent of the Zalando sales are taking place
outside Germany.
In 2012 Zalando reached break-even in its three-core
DACH markets (Germany, Austria and Switzerland).

Table 5 Zalando’s financial performance
2009 EUR

2010 EUR

2011 EUR

2012 EUR

Turnover

6 million

150 million

510 million

1,150 million

Net profits (before taxes)

Minus 1.6 million

Minus 20.4 million

Minus 60.0 million

Minus 90.0 million

Source: Based on a variety of public sources.

part I CASE STUDY

Competition
Despite growing popularity, the company has to compete
with other well-known Internet retailers, such as Asos,
Sarenza and BuyVIP in the premium segment. Initially,
Zalando could convince its growing number of customers
with good service and additional bonus campaigns. The
increasingly strong competition will force the company to
devise new strategies, such as the opening of its first retailbased outlet.
The e-commerce giant Amazon did not remain inactive and fights for its slice of the cake. It launched a new
online shop, Javari.de, which operates separately from
Amazon and focuses on shoes, handbags and accessories. It
strives to attract customers through a free delivery service,
a guarantee of low prices and a long deadline to return
goods. Zalando hopes to overtake Amazon’s position in the
clothing and footwear category in Europe.
In addition to that, more and more manufacturers/
retailers (such as Zara and H&M) are opening their
own online stores due to the good growth prospects of
e-commerce. This leads to an increase in competition and
makes it more difficult for Zalando to maintain its high
growth pace.
Zalando has been extending its lead over British
primary rival ASOS Plc as Europe’s largest online fashion

site, expanding from shoes to clothes and now selling over
1,000 brands. It doubled its 2012 net sales to €1.15 billion
(£1 billion) – see Table 6.
The business model of ASOS – full name, ‘As seen on
screen’ – is to sell cheap clothes in the style of celebrities
such as Lady Gaga, Kate Moss and Alexa Chung. This has
given it a young and loyal customer base, which is turning
from the high street to the Internet for shopping.
But the growth-orientated Zalando fashion site, founded
in 2008, is still loss-making as it spends to boost brand
awareness to get its name out on television shows such as
Germany’s Next Top Model.
External brands sold on Zalando result in a guesstimated
profit of 30–60 per cent. The profit margin could be significantly higher with an in-house brand – possibly between
60 and 80 per cent.

The role of Anders Holch Povlsen
(Bestseller) as investor
In August 2013, Anders Holch Povlsen, the owner of Danish
fashion company Bestseller A/S, bought a 10 per cent stake
in Zalando GmbH, adding the German online clothing
retailer to an investment portfolio that includes its main UK
competitor, Asos Plc.

Return rate (number of customer
returns compared with total number
ordered)

60% (estimated)

50% (estimated)

Anders Holch Povlsen (Bestseller)
ownership

10.0%

27.5%

Source: Based on different public media.

65

66

PART I Assessing the competitiveness of the firm (internal)

Anders Holch Povlsen already holds a stake of 27.5 per cent
in Asos – the UK’s largest online-only fashion retailer. The
Danish company first disclosed it held Asos shares in May
2010, and since then the stock has surged more than tenfold.
Alone, these two investments make Anders Holch
Povlsen the biggest shareholder in Asos and the thirdbiggest in Zalando, after Kinnevik (37 per cent) and European Founders Fund (EFF) (18 per cent).
Founded in Denmark in 1975 by Anders Holch Povlsen’s
parents, Bestseller sells clothing brands including Jack &
Jones and Vero Moda and has more than 3,000 stores in
38 markets. The company is the eighth-biggest retailer in
the Asia-Pacific region (it is especially strong in China) and
only the 29th biggest in Western Europe.

Questions
1 Compare and evaluate Zalando’s and Asos’ key competitive advantages and strategies in the world online apparel
market.
2 How would you explain and evaluate the value creation
and value capture of Zalando?
3 Discuss and evaluate the criteria that you would you use
for Zalando’s selection of new markets outside its current
14 countries. End up with a ranking list of the three most
attractive countries.
4 Discuss and evaluate the pros and cons for Anders Holch
Andersen Povlsen and Bestseller, regarding the investments in Zalando and Asos.
Source: Based on a variety of public sources.

Questions for discussion
Explain the differences between the RBV, the MOV and the VBV.
What is the connection between the RBV and the RM approach?
What is the purpose of the value chain?
Why is it relevant to make a split between upstream and downstream activities in the
value chain?
5 Is the value chain also a relevant model for services?
6 How can the firm create competitive advantage by the use of resources and competences
in the firm?
1
2
3
4

Learning objectives
After studying this chapter you should be able to:
●

●
●
●

●

●
●

define the concept ‘international competitiveness’ in a broader perspective from
a macro level to a micro level
discuss the basic sources of competitive advantages
explain how ‘economies of speed’ can be used as a competitive advantage
explain how Porter’s traditional competitive-based five forces can be extended
to a relationship (five sources) model
define the steps in competitive benchmarking and explain how these steps are
related to the outsourcing decision process
explain the purposes and motives for outsourcing activities
discuss the advantages and disadvantages of outsourcing

70

PART I Assessing the competitiveness of the firm (internal)

3.1

Introduction
Competitiveness is how effective and efficient a firm is, relative to its rivals, at serving customers
and resellers. Effectiveness has to do with the quality of products, market share and profitability; efficiency has to do with response speed and low costs. Both effectiveness and efficiency
depend ultimately on competitive rationality – the strength of the firm’s competitive drives and
its decision-making skills.
The topic of this chapter is how a firm creates and develops competitive advantage in the
international market. The development of a firm’s international competitiveness takes place
interactively with the business environment. The firm must be able to adjust to customers,
competitors and public authorities. To be able to participate in the international arena, the firm
must have established a competitive basis consisting of resources, competences and relations
to others in the international arena.

3.2

General sources of competitive advantage
Depending on the degree of internationalisation of its business, a company has access to
different general sources of competitive advantage. A globally operating company may derive
competitive advantage from qualities that are perhaps not available to firms with a regional or
domestic focus, such as:
●
●
●
●
●
●
●

economies of scale
economies of scope
strategic thinking as a core competence
exploitation of local advantages
ability to provide global services
company-specific competitive advantages
the ability to use human resources in developing competitive advantage.

Economies of scale (efficiencies of global scale and volume)
Economies of scale are often the main feature of a market. The theory is that the greater
the economies of scale, the greater the benefits accruing to those with a high sales volume.
As a result, the competition to achieve larger market share is intense. Economies of scale
can come about because larger plants are more efficient to run, and their cost per unit of
output may be relatively less. There may be overhead costs that cannot be avoided – even
by the smaller organisations – but can be spread over larger volumes by the bigger firms.
Economies of scale may also be the result of learning. With increasing cumulative production the manufacturer learns more and finds more efficient methods of production. All of
these effects tend to increase competition by offering incentives to buy market share in order
to become the lowest-cost producer. By the same token, economies of scale also produce
significant barriers against new entrants to the market. The higher the initial investment, the
more difficult it is to justify the investment for a new entry. But such economies of scale do
not always last forever.
Hence, where economies through large-scale operations are substantial, a firm will do all
it can to achieve scale economies. Attempts to capture scale economies may lead a firm to
compete for market share aggressively, thus escalating pressures on other firms. A similar situation occurs when a business’s fixed costs are high and the firm must spread them over a large
volume. If capacity can only be added in large increments, the resulting excess capacity will
also intensify competition.

Experience curve
(learning curve)
The drop in the average
per-unit production
cost that comes with
accumulated production
experience.

Variable cost
A cost that varies
directly in line with an
organisation’s production
or sales. Variable costs are
a function of volume.

Experience effects are based on size over time, rather than size at a particular point in time.
The experience effect reflects the improvements (usually resulting in lower costs) that result
from economies of scale, learning and improved productivity over time.
For example, capital costs do not increase in direct proportion to capacity. Higher capacity
results in lower depreciation charges per unit of output, lower operating cost in the form of
the number of operatives, lower marketing, sales, administration and research and development costs, and lower raw materials and shipping costs. It is generally recognised, however,
that cost reductions apply more to the value-added elements than to bought-in supplies. In
fact, the Boston Consulting Group discovered that costs decrease by up to 30 per cent for
every cumulative doubling of output. This phenomenon (a so-called 70 per cent experience
curve (learning curve): every time production output doubles, the unit cost falls to 70 per
cent of the former cost) is shown in part (a) of Figure 3.1. This experience curve would be
typical for the production function, whereas the experience curve is less sensitive for value
functions such as marketing and product development (see part (b) of Figure 3.1). The reason
is that these functions are more innovative in nature. While there are many implications for
marketing strategy, particularly in relation to pricing policy, discussion will be confined to the
product/market implications.
Large economies of scale exist when there are high fixed costs versus variable costs in
the predominant business model. Large organisations can amortise the fixed costs over greater
volumes, which gives them a big advantage over small competitors.
However, Toyota taught the Western world that many fixed costs can be reduced. By
reducing in-process inventories, set-up times for machinery and the overhead costs inherent
in an inventory-intensive batch-manufacturing process, Toyota flattened the scale economics of
assembling a car. CAD (computer-aided-design) systems had a similar effect on reducing the
fixed cost of designing a new model. As a result, there is no relationship between a car producer’s
market share and its profitability. Analogous innovations have flattened scale economics in
steel, electric-power generation and computers – and rendered transitory what were once
thought to be sustainable advantages (Kalpič, 2008).
Strategists in industries that today see leading companies enjoying scale-based competitive
advantage ought to ask themselves if the fundamental trade-offs that create today’s high fixed
costs might change. Consider Intel. A barrier to potential competitors is the US$700 million cost
to design a new family of microprocessors and the US$3 billion needed to build a new fabrication facility. However, disruptive technologies such as Tensilica’s modular microprocessor architecture are flattening the scale economics of design. And small fabrication facilities, or minifabs, could reduce the fixed costs of production. Such technologies take root at the bottom end
of the market first, but their capabilities are improving all the time (Christensen, 2001).

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PART I Assessing the competitiveness of the firm (internal)

Economies of scope (transfer of resources, experience, ideas
and successful concepts across products and markets)
A second source of competitive advantage, intertwined with scale economics, has been
breadth of product range. For example, through the 1970s, Caterpillar’s scope gave the
company an unassailable advantage in construction equipment against smaller competitors
such as Komatsu. Only Caterpillar was large enough to absorb the complexity-driven overhead costs of developing, manufacturing and distributing a full product range. Caterpillar’s
dealers did not need to carry equipment from other manufacturers in order to offer customers
what they needed. Caterpillar’s huge installed base of equipment in the field meant its dealers,
who were the largest dealers in each market, could afford to stock the part necessary to offer
24-hour delivery of any spare part to any Caterpillar owner. No competitor could match this
at that time.
Scope economies are also derived from activities in interrelated geographical markets. If
they are strong, a sustainable advantage in one market can be used to build sustainability in
another. The term ‘scope economy’ is not just a new name for synergy; it actually defines the
conditions under which synergy works. To achieve economies of scope, a company must be
able to share resources across markets, while making sure that the cost of those resources
remains largely fixed. Only then can economies be effected by spreading assets over a greater
number of markets.
Global companies can transfer resources between business units in different parts of the
world. These resources may include personnel (such as experienced production managers),
funds (global organisations usually have a lower capital cost than domestic firms) and superior market information. Firms such as Kraft-Jacobs-Suchard, the Swiss chocolate and coffee
manufacturer owned by Philip Morris, transfer their managers to operations where they need
their specific know-how, for example in the growing markets of Eastern Europe, and profit
from the capital transfer capacity of their company to respond quickly to market opportunities wherever they occur.
A global company is also able to transfer experience, ideas and successful concepts from
one country to another. McDonald’s country managers in Europe, for example, meet regularly
to compare notes on products and promotional ideas, but also how to avoid waste, and to
discuss whether such ideas might be appropriate in other markets. Faster knowledge transfer
and learning result in superior customer benefits through lower prices and improved product
and service features.
Finally, global companies often have a stronger brand reputation than can be achieved by
domestic companies. As travel and communication across national boundaries increase, this
potential for transfer of brand reputation is likely to grow.

Time to market
The time it takes for a
company to develop a
new product and turn
it into a product which
people can buy.
Time-based competition
Competition based on
providing time utility
by delivering a product
when the consumer
wants it.
Lead time
The time from the
moment the customer
places an order to the
moment it is received by
the customer.

Time-based competition (TBC)
Competitive advantage is a constantly moving target. The most successful firms know how
to keep moving, always staying alert and proactive. Today, time represents a powerful source
of competitive advantage and includes managing time in production and service delivery, in
new product development and introduction and in sales distribution.
Time can be expressed in a variety of ways: cycle time, time to market, new product development time, time elapsed between order placement and payment and real-time customer
responsiveness. Time-based competitors focus on both activity and system delivery times as
measures in all phases of their operations.
All time-based competition (TBC) uses process strategies to reduce one or more of the
various types of lead times faced by the company. They are implemented using such tactics
as team building, organisational flattening, flexible manufacturing systems and simultaneous
engineering. The key challenge facing any company attempting to implement TBC is to ensure
that there is a proper fit between how the company competes in the marketplace, the specific
TBC process strategies selected and the specific implementation tactics used.

CHAPTER 3 Development of the firm’s competitive advantage

73

By competing on time, a company enjoys first-entrant advantages that include higher pricing,
higher market share, improved customer service and productivity improvement. The goal of
TBC, like just-in-time, is to eliminate all wasted time from activities in the value chain. Such timereduction methods can be seen in overlapping product development activities through simultaneous engineering, improving communication channels between various functions (including
customers and suppliers), through set-up times and smoothing production flow. The underlying
premise of TBC is that the company fastest at responding to market needs will lead the rest.
The time-based competitor is able to use customer feedback to offer new products in
less time, quickly discontinuing products that do not sell well. In an early example of TBC,
Yamaha was overwhelmed when Honda responded to its challenge in motorcycles. Honda
launched many new motorcycle models in just a few months. Yamaha was forced to admit
defeat and retreat from its position as market leader. Honda’s gain of market share and its
market dominance were a direct result of time-based strategies.
A strategy built on leadership alone or flexible manufacturing alone would not have been
sufficient for Honda because Yamaha could have matched it on each score. Honda’s competitive advantage came from optimising synergies between time-based characteristics of lower
prices, flexible processes, top quality and heightened awareness of consumers via consumer
service programmes.
However, that TBC is not everything is shown by the VCR industry, where success in controlling the industry standard perhaps can indicate all competitive advantages in other areas.
Sony, as the first-to-market, initially had many competitive advantages over JVC, such as
innovation and differentiation. Yet losing in the industry standard war to JVC’s VHS format,
due to a lack of network building, diminished Sony’s many competitive advantages in the
VCR business. Sony had to abide by the standard set by JVC and reduce its own Betamax
system to a niche product, hurting its performance in the business (Ma, 2000a).
The first-generation approach to speed has been radical in many ways. Managers in North
America and Europe changed forever how they thought about manufacturing, for example.
Borrowing from the Japanese, they introduced methodologies that helped to boost production
speed and to match supply and demand more accurately. As the speed of manufacturing and
service delivery increased, attention shifted upstream towards the much longer, less tangible
product-development process. By breaking down functional barriers and introducing concurrent design processes, companies cut product development time by 30 per cent or more.
Today the focus is also on strategy. The companies that can make decisions fast, change direction nimbly and figure out when to enter and exit markets will enjoy competitive advantage.
Speed plays an increasingly important role in more traditional strategic moves, such as
mergers and acquisitions. Traditionally, acquisitions were used to buy earnings and remove
competitors in mature markets. Now, innovation and access to capabilities drive many
mergers and acquisitions. In those cases, senior managers must identify, execute and assimilate acquisitions very quickly or they will lose the deal. Partnerships can substantially enhance
a company’s ability to move swiftly by enabling it to focus on what it does best and fastest.

3.3

Introduction of a holistic model of competitiveness:
from macro to micro level
The theory of firm competitiveness implicitly assumes that the ‘competitiveness of nations’ is
not simply based on country-specific factors but heavily influenced by firm-specific factors,
as the latter is deeply ingrained in and shapes the former.
On the other hand, the competitive advantage developed by a firm in its home market is
determined to a significant extent by the national business environment, with benefits being
derived from access to resources and skills and competitive pressures derived from other
national firms creating the need to invest and innovate.

The need to understand the advantages gained by firms in industries in these countries is
valuable for the individual firm in seeing what it is about its own location that can determine
its ability to gain competitive advantage.
It is relevant to look at why a nation becomes the base for successful international competition in an industry or how it is that firms in an industry from a particular country can create
competitive advantage, and then sustain it over time.
This section focuses on the three levels of analysis – nation, industry and firm (see Figure 3.2).
To enable an understanding of the development of a firm’s international competitiveness in
a broader perspective, a model in three stages (see Figure 3.3) will be presented:

Benchmarking
The process of comparing
the company’s products
and processes to those
of competitors or leading
firms in other industries
to find ways to improve
quality and performance.
Porter’s five forces
model
The state of competition
and profit potential in an
industry depends on five
basic competitive forces:
new entrants, suppliers,
buyers, substitutes and
market competitors.

The analysis starts at the macro level and then moves into the firm’s competitive arena through

Porter’s five forces model. Based on the firm’s value chain, the analysis is concluded with a

discussion of which activities/functions in the value chain are the firm’s core competences
(and must be developed internally in the firm) and which competences must be placed with
others through alliances and market relations.
The graphical system used in Figure 3.3 (which will be referred to throughout this chapter)
places the models after each other in a hierarchical windows logic, where you get from stage 1
to stage 2 by clicking on the icon box: ‘Firm strategy, structure and rivalry’. Here, Porter’s five
forces model appears. From stage 2 to 3 we click the middle box labelled ‘Market competitors/
Intensity of rivalry’ and the model for a value chain analysis/competitive triangle appears.

Individual competitiveness and time-based competition
In this chapter the analysis ends at the firm level but it is possible to go a step further by analysing
individual competitiveness (Veliyath and Zahra, 2000). The factors influencing the capacity
of an individual to become competitive would include intrinsic abilities, skills, motivation
levels and the amount of effort involved. Traditional decision-making perspectives maintain
that uncertainty leads executives to search for additional information with which to increase
certainty. However, Kedia et al. (2002) showed that some executives increase competitiveness

Threat of
new entrants
Market level
Market
competitors Bargaining power
of buyers
Buyers
Intensity
of rivalry

Firm strategy,
structure
and rivalry

Demand
conditions

Factor
conditions

Related and
supporting
industries

Government

Relative cost

Firm B
R&D Production Marketing

Sales and
services

CHAPTER 3 Development of the firm’s competitive advantage

Section 3.5
Porter’s five forces

Perceived
value/price
B

Figure 3.3 Development of a firm’s international competitiveness
75

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PART I Assessing the competitiveness of the firm (internal)

by using tactics to accelerate analysis of information and alternatives during the decisionmaking process. For example, these executives examine several alternatives simultaneously. The
comparison process speeds their analysis of the strengths and weaknesses of options.

3.4

Analysis of national competitiveness (the Porter diamond)

Porter’s diamond
The characteristics of
the ‘home base’ play a
central role in explaining
the international
competitiveness of the
firm – the explaining
elements consist of factor
conditions, demand
conditions, related and
supporting industries,
firm strategy, structure
and rivalry, chance and
government.

Analysis of national competitiveness represents the highest level in the entire model (Figure 3.3).
Michael E. Porter called his work The Competitive Advantage of Nations (1990), but as a
starting point it is important to say that it is firms that are competing in the international
arena, not nations. Yet the characteristics of the home nation play a central role in a firm’s
international success. The home base shapes a company’s capacity to innovate rapidly in
technology and methods, and to do so in the proper directions. It is the place from which
competitive advantage ultimately emanates and from which it must be sustained. Competitive advantage ultimately results from an effective combination of national circumstances and
company strategy. Conditions in a nation may create an environment in which firms can
attain international competitive advantage, but it is up to a company to seize the opportunity.
The national diamond becomes central to choosing the industries to compete with, as well as
the appropriate strategy. The home base is an important determinant of a firm’s strengths and
weaknesses relative to foreign rivals.
Understanding the home base of foreign competitors is essential in analysing them. Their home
nation yields them advantages and disadvantages. It also shapes their likely future strategies.
Porter (1990) describes a concentration of firms within a certain industry as industrial
clusters. Within such industrial clusters, firms have a network of relations to other firms in
the industry: customers (including firms that work on semi-manufactured goods), suppliers
and competitors. These industrial clusters may go worldwide, but they will usually have their
starting point and location in a certain country or region of a country.
A firm gains important competitive advantages from the presence in its home nation of
world-class buyers, suppliers and related industries. They provide insight into future market
needs and technological developments. They contribute to a climate for change and improvement, and become partners and allies in the innovation process. Having a strong cluster at home
unblocks the flow of information and allows deeper and more open contact than is possible
when dealing with foreign firms. Being part of a cluster localised in a small geographic area
can be even more valuable, so the central question we can ask is: what accounts for the national
location of a particular global industry? The answer begins, as does all classical trade theory,
with the match between the factor endowments of the country and the needs of the industry.
Let us now take a closer look at the different elements in Porter’s diamond. Throughout the
analysis, the Indian IT/software industry (especially illustrated by the Bangalore area) will be
used as an example (Nair et al., 2007).

Factor conditions
We can make a distinction between ‘basic and advanced’ factors. Basic factors include natural
resources (climate, minerals, oil), where the mobility of the factors is low. These factors can
also create the ground for international competitiveness, but they can never turn into real
value creation without the advanced factors, such as sophisticated human resources (skills)
and research capabilities. Such advanced factors also tend to be specific to the industry.
In the Indian software industry, Bangalore has several engineering- and science-orientated
educational institutions. Also, the Indian Institute of Science (a research-orientated graduate school) can be identified as essential in the development of the software industry in
the region. The presence of the public-sector engineering firms and the private engineering
colleges has attracted young people from the country to Bangalore and it has created a diverse,

CHAPTER 3 Development of the firmâ&#x20AC;&#x2122;s competitive advantage

77

multilingual, tolerant and cosmopolitan culture. One of the most critical success factors of
the industry was the availability of advanced and highly educated human resources, but with
generalised skills. These generalists (not specialists in software or programming) could be
trained into problem solvers in specific areas, based on industry needs.

Demand conditions
These factors are represented in the right-hand box of Porterâ&#x20AC;&#x2122;s diamond (see Figure 3.3). The
characteristics of this element that drive industry success include the presence of early home
demand, market size, its rate of growth and sophistication.
There exists an interaction between scale economies, transportation costs and the size of
the home market. Given sufficiently strong economies of scale, each producer wants to serve
a geographically extensive market from a single location. To minimise transportation costs
the producer chooses a location with large local demand. When scale economies limit the
number of production locations, the size of a market will be an important determinant of its
attractiveness. Large home markets will also ensure that firms located at that site develop a
cost advantage based on scale and often on experience as well.
An interesting pattern is that an early large home market that has become saturated forces
efficient firms to look abroad for new business. For example, the Japanese motorcycle industry,
with its large home market, used its scale advantages in the global marketplace after an early
start in Japan. The composition of demand also plays an important role.
A productâ&#x20AC;&#x2122;s fundamental or core design nearly always reflects home-market needs. In electrical transmission equipment, for example, Sweden dominates the world in the high-voltage
distribution market. In Sweden there is a relatively large demand for transporting high voltage
over long distances, as a consequence of the location of population and industry clusters. Here
the needs of the home market shaped the industry that was later able to respond to global
markets (with ABB as one of the leading producers in the world market).
The sophistication of the buyer is also important. The US government was the first buyer
of chips, and remained the only customer for many years. The price inelasticity of government encouraged firms to develop technically advanced products without worrying too
much about costs. Under these conditions the technological frontier was clearly pushed much
further and much faster than it would have been had the buyer been either less sophisticated
or more price sensitive.
The Indian software industry was kick-started in connection with the Y2K problem (a
problem caused due to a coding convention in older systems that assigned only two digits
for the year count, thereby creating a potential disruption as the calendar year turned 2000),
where US firms contracted with Indian software firms that had employees who were skilled in
older programming languages, such as Cobol and Fortran. As their experience with US firms
increased and the Y2K problems were solved, India-based software firms began diversifying
and offering more value-added products and services. Serving demanding US customers
forced the Indian software firms to develop high-quality products and services. Later on, this
experience helped to address the needs of IT customers in Germany, Japan and other markets.

Related and supporting industries
The success of an industry is associated with the presence of suppliers and related industries
within a region (Chen and Hsieh, 2008).
In many cases, competitive advantages come from being able to use labour that is attracted
to an area to serve the core industry, but which is available and skilled for supporting this
industry. Coordination of technology is also eased by geographic proximity. Porter argues
that Italian world leadership in gold and silver jewellery has been sustained in part by the local
presence of manufacturers of jewellery-making machinery. Here, the advantage of clustering
is not so much transportation cost reductions but technical and marketing cooperation. In
the semiconductor industry, the strength of the electronics industry in Japan (which buys the

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PART I Assessing the competitiveness of the firm (internal)

semiconductors) is a strong incentive to the location of semiconductors in the same area. It
should be noted that clustering is not independent of scale economies. If there were no scale
economies in the production of intermediate inputs, then the small-scale centres of production could rival the large-scale centres. It is the fact that there are scale economies in both
semiconductors and electronics, coupled with the technological and marketing connections
between the two, that gives rise to clustering advantages.
In the beginning, Bangalore’s lack of reliable supporting industries (such as telecommunication and power supply) was a problem, but many software firms installed their own
generators and satellite communication equipment. Recently, firms that provide venture
capital, recruitment assistance, network, hardware maintenance and marketing/accounting
support have emerged in the Bangalore area to support the software firms. Also, the presence
of consulting firms such as KPMG, PriceWaterhouseCoopers and Ernst & Young can assist
incoming multinational companies with entering the Indian market by solving, for example,
their currency and location problems. Consequently, a whole system of support has now
evolved around the software industry.

Firm strategy, structure and rivalry

Global firm
A firm that by operating
in more than one
country gains marketing,
production, R&D and
financial advantages in
its costs and reputation
that are not available
to purely domestic
competitors.

This fairly broad element includes how companies are organised and managed, their objectives and the nature of domestic rivalry.
One of the most compelling results of Porter’s study of successful industries in ten different
nations is the powerful and positive effect that domestic competition has on the ability to
compete in the global marketplace. In Germany, the fierce domestic rivalry among BASF,
Hoechst and Bayer in the pharmaceutical industry is well known. Furthermore, the process of
competition weeds out inferior technologies, products and management practices, and leaves
as survivors only the most efficient firms. When domestic competition is vigorous, firms are
forced to become more efficient, adopt new cost-saving technologies, reduce product development time and learn to motivate and control workers more effectively. Domestic rivalry is
especially important in stimulating technological developments among global firms.
The small country of Denmark has three producers of hearing-aids (William Demant –
now Oticon, Widex and GN Resound/Danavox), which are all within the top ten of the
world’s largest producers of hearing-aids. In 1996 Oticon (previously William Demant) and
Widex fought a violent technological battle to be the first in the world to launch a 100 per cent
digitalised hearing-aid. Widex (the smaller of the two producers) won, but forced Oticon at
the same time to keep a leading edge in technological development.
In relation to the Indian software industry, most firms in the Bangalore area experience
fierce competition. The competition for future customers is not just with local firms, but also
with firms outside Bangalore and multinational companies such as IBM and Accenture. It has
resulted in a pressure on firms not only to deliver quality products and services, but also to be
cost-effective. This competition has encouraged firms to seek international certifications, with
a rating in software development. Today the Bangalore area has the world’s highest concentration of companies with the so-called CMM-SEI (Carnegie Mellon University’s Software
Engineering Institute) Level 5 certification (the highest quality rating).

Government
According to Porter’s diamond model, government can influence and be influenced by each
of the four main factors.
Governments can play a powerful role in encouraging the development of industries within
their own borders that will assume global positions. Governments finance and construct
infrastructure, providing roads, airports, education and healthcare, and can support use of
alternative energy (e.g. wind turbines) or other environmental systems that affect factors of
production.

CHAPTER 3 Development of the firm’s competitive advantage

79

In relation to the Indian software industry, the federal government in Delhi had already
targeted software as a growth area in the 1970s, because of its high skill requirements and
labour intensity. Through the 1970s and 1980s the industry was mainly dominated by public
sector companies such as CMC. In 1984 the government started liberalising industrial and
investment policies, which gave access to IT companies from abroad, such as Texas Instruments. One of the new initiatives was also setting up ‘Technology Parks’ – for example, the
Software Technology Parks (STP) in Bangalore. The liberation policy continued throughout
the 1980s and 1990s. In 1988 NASSCOM (National Association of Software and Service
Companies) was formed. NASSCOM is an association of IT firms that acts as a catalyst for
the industry growth by supporting IT research and education in India. In 1999 the Ministry of
Information Technology was set up to coordinate the IT initiatives at government, academic
and business levels.
Thus, Bangalore’s success in becoming a software hub can be attributed to the state government’s active role in the early and later stages of the industry’s evolution.

Chance
According to Porter’s diamond, national/regional competitiveness may also be triggered by
random events.
When we look at the history of most industries we also see the role played by chance.
Perhaps the most important instance of chance involves the question of who comes up with
a major new idea first. For reasons that have little to do with economics, entrepreneurs will
typically start their new operations in their home countries. Once the industry begins in a
given country, scale and clustering effects can cement the industry’s position in that country.
In relation to the development of competitiveness within the Indian software industry
(especially in Bangalore), two essential events can be identified:
1 The Y2K problems (described earlier), which created the increased demand for services of

Indian software firms.

2 The collapse of the dot-com boom in 2001 in the USA and Europe, which created the

search for ways to cut costs by outsourcing software functions to India.

From the firm’s point of view, the last two variables, chance and government, can be regarded
as exogenous variables that the firm must adjust to. Alternatively, the government may be
considered susceptible through lobbying interest organisations and mass media.
In summary, we have identified six factors that influence the location of global industries:
factors of production, home demand, the location of supporting industries, the internal structure of the domestic industry, government and chance. We have also suggested that these factors
are interconnected. As industries evolve, their dependence on particular locations may also
change. For example, the shift in users of semiconductors from the military to the electronics
industry has had a profound effect on the shape of the national diamond in that industry. To
the extent that governments and firms recognise the source of any locational advantages that
they have, they will be better able to both exploit those differences and anticipate their shifts.
In relation to the software industry in India (Bangalore), which was used throughout the
diamond model, the following conclusions may be given (Nair et al., 2007).
The software industry in Bangalore started off by serving not its domestic customers but
the demanding North American customers. Also, the rivals for the software firms tend not to
be so much local but more global.
The support needed for software services is much less sophisticated than for manufacturing.
For the manufacturing sector it is also important to have access to a well-functioning physical
infrastructure (transport, logistics, etc.), which is not necessary for the software industry, where
most of the logistics can be done over the Internet. That is one of the reasons why Bangalore’s
software industry created international competitiveness but the manufacturing sector did not.
The software industry is very much dependent on advanced and well-educated human
resources as the key factor input.

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PART I Assessing the competitiveness of the firm (internal)

While the Bangalore-based firms started off at the low end of the value chain (performing
coding work for the Y2K problem), they have continuously moved in the direction of delivering more value-added service in emerging areas.

The ‘double diamond’ and ‘multiple diamond’ framework
Double diamond
The international
competitiveness of an
industry in a country is
not only dependent on its
home country diamond
conditions but also
on those of its trading
partners.

3.5

A key limitation of Porter’s (1990) diamond model is its main focus on only home country
conditions (Rugman et al., 2012; Zhang and London, 2013). The double diamond framework
addresses this concern. Rugman and D’Cruz (1993) suggested that the international competitiveness of Canadian firms depended not only on their home country diamond conditions but
also on those of their trading partner, the United States. Consequently, the sources of a firm’s
international competitive advantage are not only limited to the home country advantages,
according to Porter’s single diamond model, but they can also be achieved by sensing and
developing competitive advantages in relationship with multiple ‘diamonds’ in several host
countries.

Competition analysis in an industry

Marketing myopia
The failure of a
company to define its
organisational purpose
from a broad consumer
orientation.

The next step in understanding the firm’s competitiveness is to look at the competitive arena
in an industry, which is the top box in the diamond model (see Figure 3.3).
One of the most useful frameworks for analysing the competitive structure has been developed by Porter. Porter (1980) suggests that competition in an industry is rooted in its underlying economic structure and goes beyond the behaviour of current competitors. The state
of competition depends upon five basic competitive forces, as shown in Figure 3.3. Together
these factors determine the ultimate profit potential in an industry, where profit is measured
in terms of long-run return on invested capital. The profit potential will differ from industry
to industry (Brookfield et al., 2008).
To make things clearer we need to define a number of key terms. An industry is a group of firms
that offer a product or class of products that are close substitutes for each other. Examples are the
car industry and the pharmaceutical industry (Kotler, 1997, p. 230). A market is a set of actual and
potential buyers of a product and the sellers. A distinction will be made between industry and
market level, as we assume that the industry may contain several different markets. This is why the
outer box in Figure 3.3 is designated ‘industry level’ and the inner box ‘market level’.
Thus the industry level (Porter’s five forces model) consists of all types of actors (new
entrants, suppliers, substitutes, buyers and market competitors) that have a potential or
current interest in the industry.
The market level consists of actors with a current interest in the market; that is, buyers and
sellers (market competitors). In section 3.6 (value chain analysis) this market level will be further
elaborated on as the buyers’ perceived value of different competitor offerings will be discussed.
Although division into the above-mentioned two levels is appropriate for this approach,
Levitt (1960) pointed out the danger of ‘marketing myopia’, where the seller defines the
competition field (i.e. the market) too narrowly (Brookfield et al., 2008). For example, European luxury car manufacturers showed this myopia with their focus on each other rather than
on the Japanese mass manufacturers, who were new entrants into the luxury car market.
The goal of competition analysis is to find a position in industry where the company can
best defend itself against the five forces, or can influence them in its favour. Knowledge of
these underlying pressures highlights the critical strengths and weaknesses of the company,
shows its position in the industry, and clarifies areas where strategy changes yield the greatest
pay-off. Structure analysis is fundamental for formulating competitive strategy.
Each of the five forces in the Porter model in turn comprises a number of elements that
combine to determine the strength of each force, and its effect on the degree of competition.
Each force is now discussed.

CHAPTER 3 Development of the firm’s competitive advantage

81

Market competitors
The intensity of rivalry between existing competitors in the market depends on a number of
factors:
●

●
●
●

●

Exit barriers
The barriers to leaving an
industry, such as the cost
of closing down a plant.

●

Concentration of the industry: numerous competitors of equal size will lead to more intense
rivalry. There will be less rivalry when a clear leader (at least 50 per cent larger than the
second) exists with a large cost advantage.
Rate of market growth: slow growth will tend towards greater rivalry.
Structure of costs: high fixed costs encourage price cutting to fill capacity.
Degree of differentiation: commodity products encourage rivalry, while highly differentiated products, which are hard to copy, are associated with less intense rivalry.
Switching costs: when switching costs are high – because the product is specialised, the
customer has invested a lot of resources in learning how to use the product or has made
tailor-made investments that are worthless with other products and suppliers (high asset
specificity) – rivalry is reduced.
Exit barriers: when barriers to leaving a market are high, due to such factors as lack of
opportunities elsewhere, high vertical integration, emotional barriers or the high cost of
closing down a plant, rivalry will be more intense than when exit barriers are low.

Firms need to be careful not to spoil a situation of competitive stability. They need to balance
their own position against the well-being of the industry as a whole. For example, an intense
price or promotional war may gain a few percentage points in market share but lead to an
overall fall in long-run industry profitability as competitors respond to these moves. It is sometimes better to protect industry structure than to follow short-term self-interest.

Suppliers
The cost of raw materials and components can have a major bearing on a firm’s profitability.
The higher the bargaining power of suppliers, the higher the costs. The bargaining power of
suppliers will be higher in the following circumstances:
●

●
●
●
●
●

supply is dominated by few companies and they are more concentrated than the industry
they sell to;
their products are unique or differentiated, or they have built up switching costs;
they are not obliged to contend with other products for sale to the industry;
they pose a credible threat of integrating forwards into the industry’s business;
buyers do not threaten to integrate backwards into supply;
the market is not an important customer to the supplier group.

A firm can reduce the bargaining power of suppliers by seeking new sources of supply, threatening to integrate backwards into supply and designing standardised components so that
many suppliers are capable of producing them.

Buyers
The bargaining power of buyers is higher in the following circumstances:
●
●
●
●
●
●

buyers are concentrated and/or purchase in large volumes;
buyers pose a credible threat of integrating backwards to manufacture the industry’s product;
products they purchase are standard or undifferentiated;
there are many suppliers (sellers) of the product;
buyers earn low profits, which creates a great incentive to lower purchasing costs;
the industry’s product is unimportant to the quality of the buyers’ products, but price is
very important.

Firms in the industry can attempt to lower buyer power by increasing the number of buyers
they sell to, threatening to integrate forward into the buyer’s industry and producing highly

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PART I Assessing the competitiveness of the firm (internal)

valued, differentiated products. In supermarket retailing, the brand leader normally achieves
the highest profitability, partially because being number one means that supermarkets need
to stock the brand – thereby reducing buyer power in price negotiations.
Customers who purchase the product but are not the end user (such as OEMs or distributors) can be analysed in the same way as other buyers. Non-end customers can gain
significant bargaining power when they can influence the purchase decision of customers
downstream (Porter, 2008). Over the years, ingredient supplier DuPont has created
­enormous clout by advertising its ‘Teflon’ brand not only to the manufacturers of cooking
equipment, but also to downstream end-customers (households). See also the section on
ingredient branding in Chapter 11.

Substitutes
The presence of substitute products can reduce industry attractiveness and profitability
because they put a constraint on price levels.
If the industry is successful and earning high profits it is more likely that competitors will
enter the market via substitute products in order to obtain a share of the potential profits
available. The threat of substitute products depends on the following factors:
●
●
●

the buyer’s willingness to substitute;
the relative price and performance of substitutes;
the costs of switching to substitutes.

The threat of substitute products can be lowered by building up switching costs. These costs
may be psychological. Examples are the creation of strong, distinctive brand personalities,
and maintaining a price differential commensurate with perceived customer values.

New entrants
New entrants can serve to increase the degree of competition in an industry. In turn, the
threat of new entrants is largely a function of the extent to which barriers to entry exist in the
market. Some key factors affecting these entry barriers include the following:
●
●
●
●
●

Strategic group
A group of firms (or
strategic business units,
or brands) operating
within an industry where
the firms (or strategic
business units, or brands)
within a group compete
for the same group of
customers (segment),
using similar marketrelated strategies.

Because high barriers to entry can make even a potentially lucrative market unattractive
(or even impossible) to enter for new competitors, the marketing planner should not take a
passive approach but should actively pursue ways of raising barriers to new competitors.
High promotional and R&D expenditures and clearly communicated retaliatory actions to
entry are some methods of raising barriers. Some managerial actions can unwittingly lower
barriers. For example, new product designs that dramatically lower manufacturing costs can
make entry by newcomers easier.

Strategic groups
A strategic group can be defined a group of companies (or strategic business units, or brands)
operating within an industry where the firms (or strategic business units, or brands) within
a group compete for the same group of customers (segment), using similar market-related
strategies. An industry could have only one strategic group if all the firms followed essentially the same strategy. At the other extreme, each firm could be a different strategic group.

CHAPTER 3 Development of the firm’s competitive advantage

83

Companies in different strategic groups compete for a different group of customers using
strategies that are different than other strategic groups. So different strategic groups do not
compete with each other, since they are pursuing different groups of customers.
Strategic group analysis is then a technique used to provide management with information
in regards to the firm’s position in the market and a tool to identify their direct competitors.
The five forces industry analysis will form the first step in this process (Porter, 1980). After
having identified the forces, the major competitors in the industry based on competitive variables will also be outlined. Competitors will then be divided into strategic groups based on
similarities in strategies and competitive positions. For this purpose, Porter’s three generic
strategies (low cost, differentiation and focus) can be used (Porter, 1985).
For example, in the auto industry, consumers who buy low-priced brands such as Suzuki,
Kia or Hyundai, etc., buy them because they are inexpensive (low-cost strategy), while those
who buy a Toyota Camry, Honda Accord, etc., are willing to pay a higher price for a car that
is bigger, has more features/options, is more reliable, etc. (differentiation strategy). Finally,
people who buy a Rolls Royce or Jaguar (focus strategy) are willing to pay a fortune for something that is very unique and prestigious.
Often a two-dimensional grid is made to position firms along an industry’s two most
important dimensions in order to distinguish direct rivals (those with similar strategies or
business models) from indirect rivals. Firms may try to shift to a more favourably situated
group, and how hard such a move proves to be will depend on whether entry barriers for the
target strategic group are high or low.

The collaborative ‘five sources’ model
Porter’s original model is based on the hypothesis that the competitive advantage of the firm
is best developed in a very competitive market with intense rivalry relations.
The five forces framework thus provides an analysis for considering how to squeeze the
maximum competitive gain out of the context in which the business is located – or how to
minimise the prospect of being squeezed by it – on the five competitive dimensions that it
confronts.
Over the past two decades, however, an alternative school (e.g. Reve, 1990; Kanter, 1994;
Burton, 1995) has emerged, which emphasises the positive role of cooperative (rather than
competitive) arrangements between industry participants, and the consequent importance of
what Kanter (1994) has termed ‘collaborative advantage’ as a foundation of superior business
performance.
An all-or-nothing choice between a single-minded striving for either competitive or
collaborative advantage would, however, be a false one. The real strategic choice problem that
all businesses face is where (and how much) to collaborate, and where (and how intensely) to
act competitively.
Put another way, the basic questions that firms must deal with in respect of these matters
are as follows:
●

●

●

choosing the combination of competitive and collaborative strategies that are appropriate
in the various dimensions of the industry environment of the firm;
blending the two elements together so that they interact in a mutually consistent and reinforcing, and not counterproductive, manner;
in this way, optimising the firm’s overall position and drawing upon the foundation and
utilisation of both collaborative and competitive advantage.

This points to the imperative in the contemporary context of complementing the competitive
strategy model with a sister framework that focuses on the assessment of collaborative advantage and strategy. Such a complementary analysis, which is called the five sources framework
(Burton, 1995), is outlined below.
Corresponding to the array of five competitive forces that surround a company – as
elaborated in Porter’s treatment – there are also five potential sources for the building of

84

PART I Assessing the competitiveness of the firm (internal)

Table 3.1 The five sources model and the corresponding five forces in the Porter model
Porter’s five forces
model

The five sources model

Market competitors

Horizontal collaborations with other enterprises operating at the same stage of the production
process/producing the same group of closely related products (e.g. contemporary global partnering
arrangements among car manufacturers).

Suppliers

Vertical collaborations with suppliers of components or services to the firm – sometimes termed vertical
quasi-integration arrangements (e.g. the keiretsu formations between suppliers and assemblers that
typify the car, electronics and other industries in Japan).

Related diversification alliances with producers of both complements and substitutes. Producers of
substitutes are not natural allies but such alliances are not inconceivable (e.g. collaborations between
fixed-wire and mobile telephone firms in order to grow their joint network size).

New entrants

Diversification alliances with firms based in previously unrelated sectors, but between which a
­blurring of industry borders is potentially occurring, or a process (commonly due to new technological
possibilities) that opens up the prospect of cross-industry fertilisation of technologies/business that
did not exist before (e.g. the collaborations in the emerging multimedia field).

Source: Burton, J. (1995) ‘Composite strategy: the combination of collaboration and competition’, Journal of General Management, 21(1): 1–23. Reproduced with
permission from The Baybrooke Press Ltd.

Five sources model
Corresponding to
Porter’s five competitive
forces there are also five
potential sources for
building collaborative
advantages together with
the firm’s surrounding
actors.

c­ ollaborative advantage in the industrial environments of the firm (the five sources model).
These sources are listed in Table 3.1.
In order to forge an effective and coherent business strategy, a firm must evaluate and
formulate its collaborative and competitive policies side by side. It should do this for two
purposes:
●

●

to achieve the appropriate balance between collaboration and competition in each dimension of its industry environment (e.g. relations with suppliers, policies towards customers/
channels);
to integrate them in a way that avoids potential clashes and possibly destructive inconsistencies between them.

This is the terrain of composite strategy, which concerns the bringing together of competitive
and collaborative endeavours.

3.6

Value chain analysis
Until now we have discussed the firm’s international competitiveness from a strategic point
of view. To get closer to the firm’s core competences we will now look at the market-level box
in Porter’s five forces model, which addresses buyers and sellers (market competitors). Here
we will look more closely at what creates a competitive advantage among market competitors
towards customers at the same competitive level.

The competitive triangle
Success in the marketplace is dependent not only upon identifying and responding to customer
needs, but also upon our ability to ensure that our response is judged by customers to be superior to that of competitors (i.e. high perceived value). Several writers (e.g. Porter, 1980; Day and
Wensley, 1988) have argued that causes of difference in performance within a market can be

CHAPTER 3 Development of the firm’s competitive advantage

85

analysed at various levels. The immediate causes of differences in the performance of different
firms, these writers argue, can be reduced to two basic factors (D’Aveni, 2007):
1 The perceived value of the product/services offered, compared to the perceived sacrifice.

The perceived sacrifice includes all the ‘costs’ the buyer faces when making a purchase,
primarily the purchase price, but also acquisition costs, transportation, installation, handling, repairs and maintenance (Ravald and Grönroos, 1996). In the models presented, the
(purchase) price will be used as a representative of the perceived sacrifice. D’Aveni (2007)
presents a strategic tool for evaluating how much a customer is willing to pay for a perceived benefit of a product/service.
2 The firm-related costs incurred in creating this perceived value.

Competitive triangle
Consists of a customer,
the firm and a competitor
(the ‘triangle’). The firm
or competitor ‘winning’
the competition depends
on perceived value
offered to the customer
compared to the relative
costs between the firm
and the competitor.
Perceived value
The customer’s overall
evaluation of the
product/service offered
by a firm, compared to a
price paid.

These two basic factors will be further discussed later in this section.
The more value customers perceive in a market offering relative to competing offerings, and the
lower the costs in producing the value relative to competing producers, the higher the performance of the business. Hence, firms producing offerings with a higher perceived value and/or lower
relative costs than competing firms are said to have a competitive advantage in that market.
This can be illustrated by the competitive triangle (see Figure 3.3). There is no onedimensional measure of competitive advantage, and perceived value (compared to the price)
and relative costs have to be assessed simultaneously. Given this two-dimensional nature of
competitive advantage it will not always be clear which of the two businesses will have a
competitive advantage over the other.
Looking at Figure 3.4, firm A will clearly have an advantage over firm B in case I, and
clearly have a disadvantage in case IV, while cases II and III do not immediately allow such
a conclusion. Firm B may have an advantage in case II, if customers in the market are highly
quality conscious and have differentiated needs and low price elasticity, while firm A may
have a similar advantage in case II when customers have homogeneous needs and high price
elasticity. The opposite will take place in case III.
Even if firm A has a clear competitive advantage over firm B, this may not necessarily result
in a higher return on investment for A, if A has a growth and B a hold policy. Thus, performance would have to be measured by a combination of return on investment and capacity
expansion, which can be regarded as postponed return on investment.
While the relationship between perceived value, relative costs and performance is rather
intricate, we can retain the basic statement that the two variables are the cornerstone
of competitive advantage. Let us take a closer look at these two fundamental sources of
competitive advantage.

Perceived value advantage
We have already observed that customers do not buy products; they buy benefits. Put another
way, the product is purchased not for itself but for the promise of what it will ‘deliver’. These
benefits may be intangible – that is, they may relate not to specific product features but rather
to such things as image or reputation. Alternatively, the delivered offering may be seen to
outperform its rivals in some functional aspect.

Perceived value (compared to the purchase price)

Relative
costs

Higher for A

Higher for B

Lower
for A

I

II

Lower
for B

III

IV

Figure 3.4 Perceived value, relative costs and competitive advantage

86

PART I Assessing the competitiveness of the firm (internal)

Perceived value is the customer’s overall evaluation of the product/service offered. So,
establishing what value the customer is actually seeking from the firm’s offering (value chain)
is the starting point for being able to deliver the correct mix of value-providing activities.
It may be some combination of physical attributes, service attributes and technical support
available in relation to the particular use of the product. This also requires an understanding
of the activities that constitute the customer’s value chain.
Unless the product or service we offer can be distinguished in some way from its competitors there is a strong likelihood that the marketplace will view it as a ‘commodity’, and so the
sale will tend to go to the cheapest supplier – hence the importance of seeking to attach additional values to our offering to mark it out from the competition.
What are the means by which such value differentiation may be gained? If we start in the
value chain perspective (see section 2.5), we can say that each activity in the business system
adds perceived value to the product or service. Value, for the customer, is the perceived stream
of benefits that accrue from obtaining the product or service. Price is what the customer is
willing to pay for that stream of benefits. If the price of a good or service is high, it must
provide high value, otherwise it is driven out of the market. If the value of a good or service is
low, its price must be low, otherwise it is also driven out of the market. Hence, in a competitive
situation, and over a period of time, the price that customers are willing to pay for a good or
service is a good proxy measure of its value.
If we look especially at the downstream functions of the value chain, a differential advantage can be created with any aspect of the traditional 4P marketing mix: product, distribution,
promotion and price are all capable of creating added customer perceived value. The key to
whether improving an aspect of marketing is worthwhile is to know if the potential benefit
provides value to the customer.
If we extend this model, particular emphasis must be placed upon the following (see
Booms and Bitner, 1981; Magrath, 1986; Rafiq and Ahmed, 1995):
●

●

●

People: these include both consumers, who must be educated to participate in the service,
and employees (personnel), who must be motivated and well trained in order to ensure
that high standards of service are maintained. Customers identify and associate the traits
of service personnel with the firms they work for.
Physical aspects: these include the appearance of the delivery location and the elements
provided to make the service more tangible. For example, visitors experience Disneyland
by what they see, but the hidden, below-ground support machinery is essential for the
park’s fantasy fulfilment.
Process: the service is dependent on a well-designed method of delivery. Process
management assures service availability and consistent quality in the face of simultaneous
consumption and production of the service offered. Without sound process management,
balancing service demand with service supply is extremely difficult.

Of these three additional Ps, the firm’s personnel occupy a key position in influencing customer
perception of product quality. As a consequence, the image of the firm is very much influenced by
the personnel. It is therefore important to pay particular attention to the quality of employees and
to monitor their performance. Marketing managers need to manage not only the service provider –
customer interface – but also the actions of other customers; for example, the number, type and
behaviour of other people will influence a meal at a restaurant.

Relative cost advantage
Each activity in the value chain is performed at a cost. Getting the stream of benefits that
accrue from the good or service to the customer is thus done at a certain ‘delivered cost’,
which sets a lower limit to the price of the good or service if the business system is to remain
profitable. Decreasing the price will thus imply that the delivered cost be first decreased by
adjusting the business system. As mentioned earlier, the rules of the game may be described
as providing the highest possible perceived value to the final customer, at the lowest possible
delivered cost.

CHAPTER 3 Development of the firm’s competitive advantage

A firm’s cost position depends on the configuration of the activities in its value chain versus
that of competitors and its relative location on the cost drivers of each activity. A cost advantage is gained when the cumulative cost of performing all the activities is lower than competitors’ costs. This evaluation of the relative cost position requires an identification of each
important competitor’s value chain. In practice, this step is extremely difficult because the
firm does not have direct information on the costs of competitors’ value activities. However,
some costs can be estimated from public data or interviews with suppliers and distributors.
Creating a relative cost advantage requires an understanding of the factors that affect costs.
It is often said that ‘big is beautiful’. This is partly due to economies of scale, which enable fixed
costs to be spread over a greater output, but more particularly it is due to the impact of the
experience curve.
The experience curve is a phenomenon that has its roots in the earlier notion of the learning
curve. The effects of learning on costs were seen in the manufacture of fighter planes for the
Second World War. The time taken to produce each plane gradually fell as learning took
place. The combined effect of economies of scale and learning on cumulative output has been
termed the ‘experience curve’. The Boston Consulting Group estimated that costs reduced on
average by approximately 15–20 per cent each time cumulative output doubled.
Subsequent work by Bruce Henderson, founder of the Boston Consulting Group, extended
this concept by demonstrating that all costs, not just production costs, would decline at a
given rate as volume increased. In fact, to be precise, the relationship that the experience
curve describes is between real unit costs and cumulative volume.
This suggests that firms with greater market share will have a cost advantage through
the experience curve effect, assuming that all companies are operating on the same curve.
However, a move towards a new manufacturing technology can lower the experience curve
for adopting companies, allowing them to leapfrog over more traditional firms and thereby
gain a cost advantage even though cumulative output may be lower.
The general form of the experience curve and the above-mentioned leapfrogging to another
curve are shown in Figure 3.5.
Leapfrogging the experience curve by investing in new technology is a special opportunity
for SMEs and newcomers to a market, since they will (as a starting point) have only a small
market share and thereby a small cumulative output.
The implications of the experience curve for the pricing strategy will be discussed further
in Chapter 12. According to Porter (1980), there are other cost drivers that determine the
costs in value chains:
●
●

Capacity utilisation: under-utilisation incurs costs.
Linkages: costs of activities are affected by how other activities are performed. For example,
improving quality assurance can reduce after-sales service costs.

Real unit cost

Relative cost position
A firm’s cost position
depends on the
configuration of the
activities in its value
chain versus that of its
competitors.

87

Firm B

New manufacturing
technology

B before
Firm A

A
B after

0
Cumulative output

Figure 3.5 Leapfrogging the experience curve

88

PART I Assessing the competitiveness of the firm (internal)
●

●

●

●

●

●

Interrelationships: for example, different SBUs sharing R&D, purchasing and marketing
will lower costs.
Integration: for example, deintegration (outsourcing) of activities to subsuppliers can lower
costs and raise flexibility.
Timing: for example, first movers in a market can gain cost advantage. It is cheaper to establish a brand name in the minds of the customers if there are no competitors.
Policy decisions: product width, level of service and channel decisions are examples of policy decisions that affect costs.
Location: locating near suppliers reduces in-bound distribution costs. Locating near customers can lower out-bound distribution costs. Some producers locate their production
activities in Eastern Europe or the Far East to take advantage of low wage costs.
Institutional factors: government regulations, tariffs, local content rules, etc., will affect costs.

Competitive benchmarking

Competitive
benchmarking
A technique for assessing
relative marketplace
performance compared
with main competitors.

The ultimate test of the efficiency of any marketing strategy has to be in terms of profit. Those
companies that strive for market share, but measure market share in terms of volume sales,
may be deluding themselves to the extent that volume is bought at the expense of profit.
Because market share is an ‘after the event’ measure, we need to utilise continuing indicators of competitive performance. This will highlight areas where improvements in the
marketing mix can be made.
In recent years a number of companies have developed a technique for assessing relative marketplace performance, which has come to be known as competitive benchmarking.
Originally, the idea of competitive benchmarking was literally to take apart a competitor’s
product, component by component, and compare its performance in a value engineering
sense with your own product (Kolar and Toporisic, 2007). This approach has often been
attributed to the Japanese, but many Western companies have also found the value of such
detailed comparisons.
The concept of competitive benchmarking is similar to what Porter (1996) calls ‘operational effectiveness’ (OE), meaning performing similar activities better than competitors
perform them. However, Porter (1996) also thinks that OE is a necessary but not a sufficient
condition for outperforming rivals. Firms also have to consider strategic (or market) positioning, meaning the performance of different activities from rivals or performing similar
activities in different ways. Only a few firms have competed successfully on the basis of OE
over a long period. The main reason is the rapid diffusion of best practices. Competitors can
rapidly imitate management techniques and new technologies with support from consultants.
However, the idea of benchmarking is capable of extension beyond this simple comparison
of technology and cost-effectiveness. Because the battle in the marketplace is for ‘share of
mind’, it is customers’ perceptions that we must measure.
The measures that can be used in this type of benchmarking programme include delivery
reliability, ease of ordering, after-sales service, the quality of sales representation and the accuracy of invoices and other documentation. These measures are not chosen at random, but are
selected because of their importance to the customer. Market research, often based on in-depth
interviews, would typically be employed to identify what these ‘key success factors’ are. The
elements that customers identify as being the most important (see Figure 3.6) then form the
basis for the benchmark questionnaire. This questionnaire is administered to a sample of
customers on a regular basis: for example, German Telecom carries out a daily telephone survey
of a random sample of its domestic and business customers to measure customers’ perceptions
of service. For most companies, an annual survey might suffice; in other cases, perhaps a quarterly survey – particularly if market conditions are dynamic. The output of these surveys might
typically be presented in the form of a competitive profile, as in the example in Figure 3.6.
Most of the criteria mentioned above relate to downstream functions in the value chain.
Concurrently with closer relations between buyers and suppliers, especially in the industrial
market, there will be more focus on the supplier’s competences in the upstream functions.

Figure 3.6 Competitive benchmarking (example with only a few criteria)

Development of a dynamic benchmarking model
On the basis of the value chain’s functions, we will suggest a model for the development of
a firm’s competitiveness in a defined market (Collis and Rukstad, 2008). The model will be
based on a specific market, as the market demands are assumed to differ from market to
market, and from country to country.
Before presenting the basic model for development of international competitiveness, we
will first define two key terms:
1 Critical success factors: those value chain functions where the customer demands/expects

Stage 1: Analysis of situation (identification of competence gaps)
We will not go into detail here about the problems there have been in measuring the value
chain functions. The measurements cannot be objective in the traditional way of thinking,
but must rely on internal assessments from firm representatives (interviews with relevant
managers) supplemented by external experts (‘key informants’), who are able to judge the
market’s (customers’) demand, now and in the future.
The competence profile for firm A in Figure 3.3 (top-right diagram) is an example of how
a firm is not in accordance with the market (= customer) demand. The company has its core
competences in parts of the value chain’s functions where customers place little importance
(that is, market knowledge in Figure 3.3).
If there is a generally good match between the critical success factors and firm A’s initial
position, it is important to concentrate resources and improve this core competence to create
sustainable competitive advantages.
If, on the other hand, there is a large gap between customers’ demands and the firm’s initial
position in critical success factors in Figure 3.3 (as with the personal selling functions), it may
give rise to the following alternatives:
●
●

improve the position of the critical success factor(s);
find business areas where firm A’s competence profile better suits the market demand and
expectations.

As a new business area involves risk, it is often important to identify an eventual gap in a
critical success factor as early as possible (Allen et al., 2005). In other words, an ‘early warning’
system must be established that continuously monitors the critical competitive factors so that
it is possible to start initiatives that limit an eventual gap as early as possible.
In Figure 3.3 the competence profile of firm B is also shown.

Stages 2 and 3: Scenarios and objectives
To be able to estimate future market demand, different scenarios are made of the possible
future development. These trends are first described generally, then the effect of the market’s
future demand/expectations on a supplier’s value chain function is concretised.
By this procedure the described ‘gap’ between market expectations and firm A’s initial position becomes more clear. At the same time, the biggest gap for firm A may have moved from

CHAPTER 3 Development of the firm’s competitive advantage

91

personal sales to, for example, product development. From knowledge of the market leader’s
strategy it is possible to complete scenarios of the market leader’s future competence profile.
These scenarios may be the foundation for a discussion of objectives and of which competence
profile the company wants in, say, five years’ time. Objectives must be set realistically and with
due consideration of the organisation’s resources (the scenarios are not shown in Figure 3.3).

Stage 4: Strategy and implementation
Depending on which of firm A’s value chain functions are to be developed, a strategy is
prepared. This results in implementation plans that include the adjustment of the organisation’s current competence level.

3.7

Blue ocean strategy and value innovation

Red oceans
Tough, head-to-head
competition in mature
industries often results in
nothing but a bloody
red ocean of rivals
fighting over a shrinking
profit pool.
Blue oceans
The unserved market,
where competitors are
not yet structured and
the market is relatively
unknown. Here it is about
avoiding head-to-head
competition.

Value innovation
A strategic approach
to business growth,
involving a shift away
from a focus on the
existing competition to
one of trying to create
entirely new markets.
Value innovation
can be achieved by
implementing a focus on
innovation and creation
of new market space.

Kim and Mauborgne (2005a, b, c) use the ocean as a metaphor to describe the competitive
space in which an organisation chooses to swim. Red oceans refer to the frequently accessed
market spaces where the products are well-defined, competitors are known and competition
is based on price, product quality and service. In other words, red oceans are an old paradigm
that represents all the industries in existence today.
In contrast, the blue oceans denote an environment where products are not yet well
defined, competitors are not structured and the market is relatively unknown. Companies
that sail in the blue oceans are those beating the competition by focusing on developing
compelling value innovations that create uncontested market space. Adopters of blue ocean
strategy believe that it is no longer valid for companies to engage in head-to-head competition
in search of sustained, profitable growth.
In Michael Porter’s models (1980, 1985), companies are fighting for competitive advantage,
battling for market share and struggling for differentiation; blue ocean strategists argue that
cut-throat competition results in nothing but a bloody red ocean of rivals fighting over a
shrinking profit pool.
A blue ocean is a market space that is created by identifying an unserved set of customers, then
delivering to them a compelling new value proposition. This is done by reconfiguring what is on
offer to better balance customer needs with the economic costs of doing so. This is as opposed to
a red ocean, where the market is well defined and heavily populated by the competition.
Blue ocean strategy should not be a static process but a dynamic one. Consider The Body
Shop. In the 1980s, The Body Shop was highly successful, and rather than compete head on
with large cosmetics companies, it invented a whole new market space for natural beauty products. During the 1990s The Body Shop also struggled, but that does not diminish the excellence of its original strategic move. Its genius lay in creating a new market space in an intensely
competitive industry that historically competed on glamour (Kim and Mauborgne, 2005b).
The work of Kim and Mauborgne (2005a) is based on a study of 150 strategic moves that
spanned more than 100 years (1880–2000) and 30 industries. Kim and Mauborgne’s first point
in distinguishing this strategy from the traditional strategic frameworks is that in the traditional
business literature the company forms the basic unit of analysis, and the industry analysis is the
means of positioning the company. Their hypothesis is that since markets are constantly changing
in their levels of attractiveness, and companies over time vary in their level of performance, it is
the particular strategic move of the company, and not the company itself or the industry, which is
the correct criterion for evaluating the difference between red and blue ocean strategies.

Value innovation
Kim and Mauborgne (2005a) argue that tomorrow’s leading companies will succeed not by
battling competitors but by making strategic moves, which they call value innovation.

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PART I Assessing the competitiveness of the firm (internal)

The combination of value with innovation is not just marketing and taxonomic positioning. It
has consequences. Value without innovation tends to focus on value creation on an incremental
scale, and innovation without value tends to be technology-driven, market-pioneering or futuristic – often overshooting what buyers are ready to accept and pay for. Conventional Porter logic
(1980, 1985) leads companies only to compete at the margin for incremental share. The logic
of value innovation starts with an ambition to dominate the market by offering a tremendous
leap in value. Many companies seek growth by retaining and expanding their customer base.
This often leads to finer segmentation and greater customisation of offerings to meet specialised
needs. Instead of focusing on the differences between customers, value innovators build on the
powerful commonalities in the features that customers value (Kim and Mauborgne, 1997).
Value innovation is intensely customer-focused, but not exclusively so (Abraham, 2007).
Like value chain analysis it balances costs of delivering the value proposition with what the
buyer values are, and then resolves the trade-off dilemma between the value delivered and
the costs involved. Instead of compromising the value wanted by the customer because of the
high costs associated with delivering it, costs are eliminated or reduced if there is no or less
value placed on the offering by the customer. This is a real win–win resolution that creates a
compelling proposition. Customers get what they really want for less, and sellers get a higher
rate of return on invested capital by reducing start-up and/or operational delivery costs. The
combination of these two is the catalyst of blue ocean market creation (Sheehan and Vaidyanathan, 2009). Exhibit 3.1 illustrates this by using the case of Formule 1.
The output of the value innovation analysis is the value curves of the different marketers
in the industry (also called ‘strategy canvas’ in Kim and Mauborgne, 2005 – see Exhibit 3.1).
These different value curves raise four basic questions for the focal firm:
1
2
3
4

Which factors should be reduced well below the industry standard?
Which of the factors that the industry takes for granted should be eliminated?
Which factors should be raised well above the industry standard?
Which factors should be created that the industry has never offered?

These four questions can be reduced to two simple strategies in order to create ‘value innovation’:
Reducing costs (1 and 2) (see Figure 3.8)
Increasing customer value (3 and 4) (see Figure 3.8)
When both strategies are being realised at the same time, the ‘overlapping’ area will be
higher (= increasing ‘value innovation’) (see Figure 3.8).

Cost reduction
1. Which factors that the industry takes for granted
can be eliminated?
2. Which factors should be reduced well below the
industry standard?

Costs

Value
innovation

Buyer value increase
1. Which factors should be raised well above the
industry standard?
2. Which factors should be created that the
industry has never offered?

EXHIBIT 3.1
Value innovation at hotel chain Formule 1
When Accor launched Formule 1 (a line of French budget hotels) in 1985, the budget hotel industry was suffering
from stagnation and overcapacity. The top management urged the managers to forget everything they knew of the
existing rules, practices and traditions of the industry. There were two distinct market segments in the industry. One
segment consisted of no-star and one-star hotels (very cheap, around €20 per room per night) and the other segment
comprised two-star hotels, with an average price of €40 per room. These more expensive two-star hotels attracted
customers by offering better sleeping facilities than the cheap segment. Accor’s management undertook market

research and found out what most customers of all budget hotels wanted: a good night’s sleep at a low price. Then
they asked themselves (and answered) the four fundamental questions:

1 Which of the factors that the budget hotel industry took for granted should be eliminated?
The Accor management eliminated such standard hotel features as costly restaurants and appealing lounges. Accor
reckoned that they might lose some customers by this, but they also knew that most customers could live without
these features.

2 Which factors should be reduced well below the industry standard?
Accor also believed that budget hotels were overperforming along other dimensions. For example, at Formule 1
receptionists are on hand only during peak check-in and check-out hours. At all other times, customers use an automated teller. The rooms at Formule 1 are small and equipped only with a bed and bare necessities – no desks or
decorations. Instead of closets there are a few shelves for clothing.

3 Which factors should be raised well above the industry standard?
As seen in Formule 1’s value curve Figure 3.9, the following factors:
●
●
●

the bed quality
hygiene
room quietness

were raised above the relative level of the low-budget hotels (the one-star and two-star hotels). The price-performance was perceived as being at the same level as the average one-star hotels.

4 Which new factors (that the industry had never offered) should be developed?
These covered cost-minimising factors such as the availability of room keys via an automated teller. The rooms themselves are modular blocks manufactured in a factory. That is a method that may not result in the nicest architectural
aesthetics but gives economies of scale in production and considerable cost advantages. Formule 1 has cut in half
the average cost of building a room, and its staff costs (in relation to total sales) dropped below the industry average
(approximately 30 per cent) to between 20 per cent and 23 per cent. These cost savings have allowed Accor to
improve the features that customers value most (‘a good night’s sleep at a low price’).
Note that in Figure 3.9, if the price is perceived as relatively low, it is regarded as a strong performance.

What has happened with Accor and Formule 1?
Today, Accor is owner of several hotel chains (besides Formule 1) – for example, Mercure, Sofitel, Novotel, Ibis and
Motel 6. In 2005 the sales of Accor Group were €7.6 billion. As of 1 January 2006, Formule 1 has the following number
of hotels in the following regions of the world (see Table 3.2).
Formule 1 is represented in 12 countries: France, Germany, Sweden, the UK, The Netherlands, Switzerland, Spain,
Belgium, South Africa, Japan, Australia and Brazil. In France, Formule 1’s market share in the budget hotel segment is
approximately 50 per cent.

The resulting new value curve should then determine if the firm is on its way into the
‘blue ocean’.

3.8

Outsourcing – a strategic decision framework based on
customers’ evaluation

Outsourcing
Using another firm for
the manufacture of
needed components or
products or delivery of a
service.

After the dynamic benchmarking process the firm might have an idea about whether it should
perform a certain value chain activity itself or if it should consider letting somebody else do
it – that is, outsource the activity.
It is important for a firm to decide which competences to keep in-house and which to
outsource. The u nderlying assumption is that a firm should outsource non-core activities to
be able to focus more on the core competence.
Over the last number of years, outsourcing has become an important issue for many
organisations. The potential for outsourcing has moved from peripheral activities, such as
cleaning and catering, to critical activities such as design, product development, IT, manufacturing, logistics and marketing/advertising.
What is outsourcing? The word outsourcing defines the process of transferring the responsibility for a specific business function from an internal employee group to an external partner. An
example of outsourcing (and how the boundary of the firm is ‘reduced’) is shown in Figure 3.10.
Though there might be differences, in- or outsourcing and make or buy analysis will be
regarded as synonyms in this book.
Outsourcing is a contractual agreement between the firm and one or more suppliers
to provide services or processes that the firm is currently providing internally. The fundamental difference between outsourcing and any other purchasing agreement is that the firm
contracts-out part of its existing internal activity. There are many reasons why a company may
choose to outsource and it will rarely be for one single reason.
The three most obvious reasons are listed in Table 3.3.
The hybrid situations enable the two organisations supporting the same market to share
resources and increase revenue through synergistic relationships.
As indicated, one of the reasons why firms have outsourced a number of their primary
supply chain activities is that the costs of remaining up to date in a multitude of value chain
activities has become financially onerous. Where technology moves the fastest, the problem is

Boundary of the firm
Time 1
End
consumer

Retail
outlets

PC assembly
and manufacture

Components and
software systems

Commodities and
raw materials

PC assembly
and manufacture

Components and
software systems

Commodities and
raw materials

Time 2 (after outsourcing)
End
consumer

Retail
outlets

Sourcing relationship

Figure 3.10 Example of primary supply chain outsourcing in an IT firm

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PART I Assessing the competitiveness of the firm (internal)

Table 3.3 Reasons why companies outsource
Rationale

Description

Cost reduction

Outsourcing to another party
to reduce cost of operations.

Benefits
●
●
●

Revenue generation

Hybrid situations

Contracting with another party
to provide products or services
that the outsourcing firm cannot offer on its own.
Collaborations, alliances,
partnerships, etc. with two or
more like parties in the same
business line, to offer complementary products or services.

the most serious. It would not be a surprise to learn, therefore, that a number of the pioneering
outsourcers have been in the IT sector.

An outsourcing/insourcing framework
The stages involved in the outsourcing framework are illustrated in Figure 3.11. The stages
will now be described.

Stage 1: Analysis
Key success factors (KSF)
Those factors in a
market that determine
competitive success or
failure in that market.

Stage 1a: Evaluating customer value (KSF)
Activities with high customer value are often key success factors (KSF), which are central
to the firm successfully serving the needs of potential customers in each market. To point
out KSFs, customers are asked if the firm’s value chain activities are adding value for them.
This is done by asking about the importance of activities (see also the questionnaire in
Figure 3.6).
Stage 1b: Evaluating the firm’s relative competence strengths
Focusing attention on customer needs and competitive advantage will involve applying the
firm’s distinctive capabilities to meet these needs. Here, each selected activity must be benchmarked against the capabilities of all potential external providers of that activity. This will
enable the company to identify its relative performance for each activity (also illustrated in
Figure 3.6’s questionnaire).
The depth of evaluation of the organisation’s value chain can take place at the activity (such
as logistics) or sub-activity (materials handling) level, depending on the particular circumstances of the organisation.

Stage 2: Decision about in/outsourcing
Stages 1a and 1b identify the disparity between the sourcing company and potential
external providers of the core activities. It allows companies to focus on whether it will
be detrimental to their competitive position to outsource activities such as research and
development, design, engineering, manufacturing, marketing and service, both in the short
and long term.
Before the final decision the firm must identify and measure the costs associated with
either retaining the activity in-house or outsourcing the activity.

CHAPTER 3 Development of the firmâ&#x20AC;&#x2122;s competitive advantage

In Box I in Figure 3.11 the firm faces one of its value chain activities, which only delivers
low customer value, and the firm is also relatively poor in performing the activity (low relative
competence strength). In this situation it is more appropriate for the company to outsource
the activity to external suppliers that are more competent and have a lower cost base.
Unlike Box I, Box III is a situation where the company can focus resources on the activities
where it can achieve pre-eminence and provide high customer perceived value. For example,

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PART I Assessing the competitiveness of the firm (internal)

Personal selling
Person-to-person
interaction between
a buyer and a seller
wherein the seller’s
purpose is to persuade
the buyer to accept a
point of view, to convince
the buyer to take a course
of action, or to develop a
customer relationship.

if a company has leadership in a core activity then this activity should be held and further
developed within the company in order to maintain and build this core competence.
In Boxes II and IV the outcome can be either keeping the activity in-house or outsourcing
depending on the specific situation. The situation in Box II is very similar to the evaluation
of the activity of personal selling in Figure 3.3. In this situation, the firm could outsource
the activity (because it is not good at performing the activity) or it could try to develop its
competence level and move it from Box II to Box III, because the activity is very important
for the customer.
The outcome of Box IV could also be a selective in/outsourcing depending on the situation. Perhaps this firm is able to transfer its high relative strength in these activities to another
industry or a new customer group who would value it more? This would be a reverse situation, where the firm itself would function as a sub-supplier to another outsourcing company.

Stage 3: Implementation
If the outcome of stage 2 is outsourcing (Box I), the firm believes it can be more flexible by
outsourcing activities than performing activities internally by being in a better position to
react rapidly to market changes and be more responsive to customer change. This strategy
will result in the company gradually becoming a ‘systems integrator’, in which it manages and
coordinates a network of best production and service providers. Such a strategy is based on
the premise that the company should outsource those activities (both production and service)
where it can develop no strategic advantage itself.
From this analysis of potential suppliers, the company will filter out any potential suppliers
that are unsuitable (see also the screening of potential suppliers in Figure 4.11). If it is found
that there are no suppliers suitable with which to initiate a relationship, then the company
may pursue an ‘Invest to perform internally’ strategy. However, if the company has found a
suitable supplier then it should form a relationship while leveraging its own capabilities by
focusing resources on high value-added activities.
A number of issues have to be addressed before the actual outsourcing to the chosen
supplier can take place. The company may wish to maintain the knowledge (design skills,
management skills, manufacturing, etc.) that enable the technology of the activity to be
exploited, even when it is being provided by another partner. Therefore, it is important that
the company controls the new product development and design process, as these are the
activities that will drive future growth. The company may establish a partnership relationship or strategic alliance with a supplier in order to exploit their capabilities. This involves an
intensive collaborative working relationship with the prospective partner.
If the company has succeeded in developing a best-in-world core competence, it would
never outsource it. The company may even prefer to build defensive rings of essential competences that customers insist it have, or that protect its core competence – as Sony has done
(see Exhibit 3.2).

EXHIBIT 3.2
Sony, an outsourcing company
Sony, as one of the largest electronics manufacturers in the world, certainly enjoys market power because of its strong
market position globally – for example, its dominant position in the personal stereo segment of the personal electronics market. Its efficient manufacturing capability and outsourcing expertise provide operating advantages. Sony is
a firm that is known to be a pioneer, not a follower. Innovation lies at the heart of the whole corporation. It constantly
launches new products and models to overwhelm the me-too competitors. And Sony is a company that is willing to

make commitments, for good or bad, even when a technology’s commercial viability is uncertain. Its commitment to
the Betamax format in the VCR industry caused it to lose out in that lucrative market because it failed to become the
industry standard. Sony failed to establish its leadership position in its business system of fellow VCR producers. The
same can be said about its stubbornness in going alone on Mini-Disc and Digital Audio Tape (DAT), and not sharing its
format through network alliances.
Nonetheless, one has to appreciate Sony’s remarkable consistency and discipline in implementing its strategy: it
is both a pioneer and the proprietary beneficiary of its new technology. Sony’s miniaturisation skills have often been
cited as a classical example of corporate core competence (see Figure 3.12), which enables it to enjoy a commanding
lead in portable and pocket-size electronics (Prahalad and Hamel, 1990).
Its unique capability lies in quickly adopting new knowledge and technology. In this sense, Sony is definitely a
leading company in time-based competition.
Although it favours proprietary technology, Sony is also no stranger to cooperation and learning-inspired
collaborative arrangement. To tackle technical challenges and share risks in R&D, in the late 1970s and early 1980s,
Sony jointly developed the CD format with Philips. Once it learnt enough from its partner and ironed out major
technical obstacles, it decided to make a greater commitment to manufacturing facilities faster than Philips did
and pre-empt the worldwide market for CD players. Philips saw the CD format as essentially a high-end consumer
product, whereas Sony treated it as the future industry standard and a potential blockbuster for the firm, which
would succeed its colour TV and Walkman as the next star product and help sustain its growth.
Sources: After Ma (2000b); Quinn (2000).

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PART I Assessing the competitiveness of the firm (internal)

Table 3.4 Advantages and disadvantages of outsourcing
Advantages
●

●

●

Offers significant cost savings across a wide
range of low-margin, non-differentiated services, as well as additional income opportunities.
Outsourcing non-critical functions permits a
company to increase its financial resources.
Eliminates investments in fixed infrastructure.

Allows for greater quality and efficiency.
Permits increased access to functional
expertise.
● Outsourcing provides a competitive advantage and creates new revenue streams by
allowing suppliers to offer services that would
otherwise require considerable expense and
commitment of personnel.
●

Disadvantages
●
●

●

●

●

●

●

Using an outside provider allows suppliers to
test market-demand for a product or service
in a less risky, more cost-effective way than
creating the service internally with service
resources.

●

●

●

Requires a change in management mind set.
Requires a new and more complicated level of
communication.
Introduces a host of new outlooks, personalities and demands that can produce new
problems.
Introduces insecurity to the workforce and
unions.
Monitoring and evaluating the performance of
suppliers is a difficult task.
Outsourcing functions that have customer
contact risks alienating customers.
Outsourcing benefits may not be realised in
the short term.

Long-term contracts that feature short-term
savings may prove expensive later (resulting in
high transaction costs).

Transaction costs
The total of all costs
incurred by a buyer
and seller as they
gather information and
negotiate a transaction.

3.9

Outsourcing can create a number of economic advantages. However, there are also a number
of risks in outsourcing, which may create perceived disadvantages (see Table 3.4).
These disadvantages are mostly of a psychological nature and if managed effectively do
not lead to financial losses. For example, partnering with a third party introduces a host of
new outlooks, personalities and demands that can produce new problems. These challenges
include a more complicated level of communication, insecurity in the workforce and the risk
of high transaction costs.
The biggest barrier to outsourcing is that it requires a change in management mind set.
Many managers fear the loss of control or conflict of interest and fail to compare the cost
and benefit of using internal support organisations. Managers faced with an outsourcing
decision often construe the financial cost and loss of control over individuals as their
­justification for not outsourcing, but fail to consider the long- and short-term savings to
the organisation.
Motivating employees for the change towards outsourcing is not an easy task. However, the
risk associated with outsourcing can be offset and controlled if managed properly.

Summary
The main issue of this chapter is how the firm develops competitive advantage in the international marketplace. The sources of competitive advantage are:
●
●
●

exploitation of local advantages;
ability to provide global services;
ability to use ‘human resources’ (HR) (HR are especially important for RM and internal
marketing).

A three-stage model allows us to understand the development of a firm’s international
competitiveness in a broader perspective.

Analysis of national/regional competitiveness
The Porter diamond indicates that the home base plays a central role in the firm’s international success.

Competition analysis
Here the firm itself is the unit of analysis. Porter’s five forces model suggests that competition
in an industry is rooted in its underlying industry structure. The state of competition depends
on five basic competitive forces, which determine profit potential in an industry.

Value chain analysis
According to the competitive triangle, it can be concluded that firms have competitive advantage in a market if they offer products or services with the following characteristics:
●
●

a higher perceived value to the customers;
lower relative costs than the competing firms.

Influenced by core competency thinking, many companies have been attempting to reorganise their value chains and focus on a number of core activities in which they can achieve
and maintain a long-term competitive advantage and outsource all other activities where they
do not have high relative competence strength.
While the motives for outsourcing are normally specific to the particular situation, some
commonly cited reasons are to:
●
●
●
●
●

The biggest obstacle to outsourcing is that the management may fear they will lose control.
However, the risks associated with outsourcing can be offset and controlled if managed properly.

Case stUDY 3.1
Nintendo Wii: Nintendo’s Wii took first place on the
world market – but it didn’t last

When it was launched, very few analysts would have predicted
that Nintendo Wii would one day be market leader in the
games console market against the established PlayStation 3
(PS3) and Xbox 360 brands. But analysts can be wrong: in the
week ending 23 August 2007 www.vgchartz.com data, which
is based on sample data from retailers all over the world, indicated that Nintendo’s Wii (which was released in November
2006 – one year after the Xbox 360) had passed the Xbox
360’s lifetime unit sales, making Nintendo the new world
market leader in both the games and console businesses.
this had a big impact on third party publishers and
also influenced the decisions that the three major players
(microsoft, Sony and Nintendo) would make in the future.
One factor that no doubt helped Nintendo’s Wii to grow so
quickly was the console’s broad appeal across all age groups,
demographics and countries. however, Nintendo’s first place
in the world market came under massive attack from both
Sony and microsoft’s new sensing devices (see below).

Nintendo – key facts and financial data
Nintendo Co. was founded in 1889 as the marufuku
Company to make and sell ‘hanafuda’, Japanese game cards.
It became the Nintendo Playing Card Company in 1951 and
began making theme cards under a licensing agreement
with Disney in 1959. During the 1980s Nintendo sought new
products, releasing the Game Boy in 1989 and the Super
Family Computer game system (Super NeS in the US) in
1991. the company broke with tradition in 1994 by making
design alliances with companies like Silicon Graphics. After
creating a 32-bit product in 1995, Nintendo launched the
much-touted N64 game system in 1996. It also teamed
up with microsoft and the Nomura Research Institute on
a satellite-delivered internet system for Japan. Price wars
between the top contenders continued in the US and Japan.
In 1998 Nintendo released Pokémon, which involved
trading and training virtual monsters (it had been popular
in Japan since 1996), in the US. the company also launched
the video game The Legend of Zelda: Ocarina of Time, which
sold 2.5 million units in about six weeks. Nintendo issued
50 new games in 1998, compared with Sony’s 131 games.
In 1999 Nintendo announced that its next-generation
game system, Dolphin (later renamed GameCube), would
use IBm’s PowerPC microprocessor and matsushita’s DVD

players. In September 2001 Nintendo launched the longawaited GameCube console system (which retailed at $100
less than its console rivals, Sony’s PlayStation 2 and microsoft’s
XBox); the system debuted in North America in November. In
addition, the company came out with Game Boy Advance,
its newest hand-held model with a bigger screen and faster
chip.
In 2003 Nintendo bought a stake (about 3 per cent) in
game developer and toy maker Bandai, a move expected
to solidify cooperation between the two companies in
marketing game software.
today Nintendo (www.nintendo.co.jp) is engaged in the
creation of interactive entertainment products. It manufactures and markets hardware and software for its home video
game systems. the company primarily operates in Japan,
europe and America. It is headquartered in Kyoto, Japan.
In total the whole Nintendo Group (including subsidiaries)
employs about 4,700 people.
In the fiscal year 2011 Nintendo’s recorded revenues
were $12.2 billion, a decrease of 68 per cent over 2010. the
net income of the company was $0.9 billion during fiscal
year 2011, compared with $2.8 million in 2010. Approximately 83 per cent of the company’s revenue is generated
from regions outside Japan.
Over the years Nintendo has managed to achieve higher
returns on its investments, assets and equity compared with
the industry average. Nintendo has not raised any capital
through debt in the past few years. the company’s total debt

the Nintendo Wii
Source: Lightly Salted/Alamy Images.

part I CASE STUDY

to equity ratio at the beginning of 2011 was zero compared
with industry average of 12 per cent. Debt-free status indicates the company’s ability to finance its operations efficiently. Additionally, having no debt obligation provides the
company with significant liquidity and financial flexibility.

In a forbes.com interview, Perrin Kaplan, vice president
of marketing and corporate affairs for Nintendo of America,
discussed its implementation of blue ocean:
Inside Nintendo, we call our strategy ‘blue ocean.’ This is in
contrast to a ‘red ocean.’ Seeing a blue ocean is the notion
of creating a market where there initially was none – going
out where nobody has yet gone. Red ocean is what our
competitors do – heated competition where sales are
finite and the product is fairly predictable. We’re making
games that are expanding our base of consumers in Japan
and America. Yes, those who’ve always played games are
still playing, but we’ve got people who’ve never played to
start loving it with titles like Nintendogs, Animal Crossing
and Brain Games. These games are blue ocean in action.
(Rosmarin, 2006)

The video game console industry
The interactive entertainment software market is characterised by short product life cycles and frequent introductions
of new products.
The game consoles are relatively expensive at the beginning of the product life cycle. Hard-core game freaks pay
dearly to have a console early, but sales really jump in years
two and three, as Moore’s law and economies of scale drive
prices down and third-party developers release must-have
games. By year four the buzz will have begun about the next
generation, and the games consoles will often be found at
the local grocery store at discount prices.
Nintendo has been operating in the video game console
market since 1977 with colour television games, and is
considered the oldest company in this market. It is one of
the largest console manufacturers in the world, and a leader
in the hand-held console market. The company released five
generations of consoles over the past two decades, including
the Nintendo Entertainment System, Super Nintendo
Entertainment System, Nintendo 64, GameCube and Wii.
Nintendo has dominated the hand-held games market
since its release of the original Game Boy hand-held system
in 1989. for example, in fiscal year 2007, Nintendo sold
79.5 million units of the Game Boy Advance (GBA). Nintendo
DS, another handheld console of Nintendo, had, by
September 2011, already had a lifetime sales of 150 million.

Part of blue ocean strategy involves creating a strategy
canvas that depicts the current marketspace and relative
offering level for major attributes that companies compete
on. It helps visualise which offerings cost more to compete
on. It also helps companies to identify which values to eliminate, reduce and/or raise and, finally, it helps to identify
new values that aren’t currently competed on.
Figure 1 shows a strategy canvas for the Nintendo Wii,
compared with Microsoft’s Xbox 360 and Sony’s PlayStation 3,
at the point of introduction in late 2006. The x -axis of the
graph lists the primary sources of Wii’s competitive advantages, at the time of introduction (end of 2006):
●●

CPU power: Wii had a comparatively low processor
speed and no Dolby 5.1 (sound system). Both PS3 and
Xbox 360 had processors that were far more powerful
than you would find in most PCs.

●●

Storage (hard disk): in the basic model, Wii had no hard disk.

●●

High-definition video: both PS3 and Xbox 360 used highend graphics chips that supported high-definition games
and were prepared for high-definition TV. Wii’s graphics
were marginally better than the PS2 and the original
Xbox, but Wii paled next to the PS3 and Xbox 360.

●●

DVD: both Sony and Microsoft provided the DVD opportunity. Sony even included a Blu-Ray DVD drive.

●●

Connectivity (online): the Xbox especially had positioned
itself as the online games console with multi-player
­functions.

●●

Motion-controllable: with its innovative motion control
stick Wii added new value to game playing. The stick
integrated the movements of a player directly into the
video game (e.g. tennis, golf, sword fights).

●●

Unique gameplay: the new Wii gaming console sensed
depth and motion from players, thus adding a whole
new element to the play experience.

Nintendo’s launch of Wii
Nintendo launched the Wii in November 2006. Nintendo’s
arguments for using this brand name were:
●●

Wii sounds like ‘we’, which emphasises this console is for
everyone.

●●

Wii can easily be remembered by people around the
world, no matter what language they speak.

●●

Wii has a distinctive ‘ii’ spelling that symbolises both the
unique controllers and the image of people gathering to play.

The genius of the Wii is that it has changed the rules and
invented a type of gaming with massively enhanced interaction between player and game.

Wii’s blue ocean strategy
Nintendo is attempting to create a blue ocean by creating
a unique gaming experience and keeping the cost of its
system lower than Sony’s and Microsoft’s.

Family-oriented (large public): with the motion control
stick Nintendo opened up the console world to a
completely new public of untapped non-gamers from
the age of around 30. Parents and even grandparents
enjoyed playing the Wii.

Wii’s market shares compared with
­Microsoft (Xbox) and Sony (SP3)
Table 1 shows the worldwide sales of games consoles from
2005 to 2012, together with the corresponding market share.
Current Wii sales are pretty evenly split between the
three major markets – 30 per cent have been sold in Japan,
the American market (including Canada and South America)
accounts for 40 per cent, and other markets (including
Europe and Australia and a few niche markets) for 30 per cent.
The sales of Sony (PS2 and PS3) and Microsoft (Xbox and
Xbox 360) have been more unequally distributed: Microsoft sells most of its Xbox and Xbox 360 Consoles in North
America, whereas Sony’s biggest markets for PS2 and PS3
are Japan, China and the rest of Asia.
At the retail level, games consoles are sold through a
variety of electronic and audio/video retailers, supermarkets, discount stores, department stores and internet retail
stores.

Nintendo’s strategy
Wii managed to become a market leader by emphasising
its simplicity and lower price (than Sony and Microsoft) to
break down barriers for new customers.
Nintendo has attracted non-traditional users, such as
women and those over 60 years old, with easy-to-play

titles such as Brain Training and Wii Fit (launched in April/
May 2008). The Brain Training software is sold to middleaged people, who seek to stimulate their memories and
learning processes. The £70 Wii Fit game comes with a
balance board – which links to the Wii console wirelessly.
Players can stand, sit or lie on the board and do a range of
exercises such as yoga and press-ups, as well as simulating
slalom skiing or hula hooping – all with the guidance of an
on-screen fitness expert. Experts think that this game can
help people to lose weight. Playing the Nintendo Wii Fit
can also improve balance and help avoid falls among older
people. Researchers also ultimately hope to determine the
effectiveness of computer games in developing muscle
strength and coordination and reducing the risk of falls for
people with Parkinson’s disease.
Nintendo is highly dependent on subsuppliers, for
both hardware and software. The company commissions
a number of subsuppliers and contract manufacturers
to produce the key components of game consoles and
assemble finished products. The company was not able to
meet the growing demand for its new Wii console, after its
November 2006 launch, as its suppliers were not able to
ramp up their production to meet the demand. A shortage
of key components or the finished products had a negative
effect on the company’s revenues.
Nintendo is also very much dependent on its software
suppliers, who all develop new games based on a licensing
agreement with Nintendo.
While the hardware (consoles) market is dominated
by three players, the software market is more open and
fragmented, with several regional players and local developers. However, the games software industry is undergoing a period of consolidation. At the end of 2007, French

part I CASE STUDY

105

Table 1 World sales of games consoles (units) and market shares
2005

2006

Mill
units

%

Mill
units

Sony PS3
(+ earlier
versions)

16.8

69

12.9

Microsoft
Xbox 360
(+ earlier
versions)

4.8

20

Nintendo
Wii + ‘U’
(+ earlier
version GameCube)

2.7

11

Total

24.3

2007
%

Mill
units

2008
%

Mill
units

2009
%

Mill
units

2010
%

Mill
units

2011
%

Mill
units

2012
%

Mill
units

%

53 15.8

40 17.7

33 17.5

35 17.4

35 14.1

36 11.9

40

7.5

31

7.8

20 11.2

21 10.2

21 13.6

28 13.8

35 10.5

35

4.0

16 15.5

40 24.8

46 21.8

44 18.1

37 11.6

29

25

100 24.4

100 39.1

100 53.7

100 49.5

100 49.1

100 39.5

5.1 1
2.4 =
7.5

100 29.9

100

Source: Based on www.vgchartz.com.

Vivendi Games acquired a 52 per cent stake in Activision
and created a new entity, Activision Blizzard, which in size
was close to that of the market leader, Electronic Arts. For
example, Activision Blizzard launched Guitar Hero World
Tour for all three platforms in December 2007, at the same
time as the announcement of the acquisition of Activision.

The competitors’ strategy
The two main Wii competitors have both undergone some
dramatic changes since the first console was introduced, as
discussed in the following.

Sony PlayStation
In 2008, cumulative sales of the PlayStation 2 (PS2) reached
130 million units, making it the world’s best-selling game
platform. However, the 2006–07 launch of Sony’s newgeneration PS3 did not translate into the immediate success
that the company had hoped for. It was not as successful as
the Nintendo Wii. Sony suffered from a perception that it
was a complex console only to be used in a darkened room
by qualified young men. The core age group used to be a
tight demographic group of 14–30 year-old men.
In September/October 2010 Sony launched the PlayStation Move, a motion-sensing game controller platform
for the PlayStation 3 (PS3) video game console. Based on a
handheld motion controller wand, PlayStation Move uses
the PlayStation Eye camera to track the wand’s position and
inertial sensors in the wand to detect its motion.

Microsoft Xbox 360
Microsoft continues to target the ‘serious’ gamer segment
with the Xbox 360. The Xbox graphics, games and Xbox

Live internet gaming have been popular with the core user
segment, primarily young males. The US market remains
the most important so far, accounting for nearly 50 per cent
of the overall Xbox sales.
Xbox is the console with the highest ‘game attach’ rate.
This is defined as the average number of games each
console owner buys. For the Xbox 360, Microsoft managed
a ‘games per console’ average of 8 to 1 in 2008, the highest
in the industry.
The strength of Microsoft’s software distribution network
has also kept the company alive in the business, allowing
Microsoft to have a presence in more worldwide markets
than Nintendo. Microsoft is strongly positioned in countries
like China, India, Malaysia and South Africa, all of which are
growth markets, and this is promising for future sales of Xbox.
In November 2010 Kinect for Xbox 360, or simply Kinect
(originally known by the code name Project Natal), was
introduced worldwide. It is a motionsensing input device
for the Xbox 360 video game console. Unlike its rivals,
Microsoft’s Kinect does not use a controller. Instead, a
series of sensors allow the gamer to control the action using
gestures, movement and speech. Based around a webcamstyle add-on peripheral for the Xbox 360 console, it enables
users to control and interact with the Xbox 360 without the
need to touch a game controller, through a natural user
interface using gestures and spoken commands.

Nintendo’s response to its rivals’ new
products – the Wii U
In November 2012 Nintendo’s new Wii U was released for
worldwide sale. The Wii U console and controller prototypes were first revealed at the E3 2011 exhibition. The Wii

106

PART I Assessing the competitiveness of the firm (internal)

In 2013 the new Super Mario Bros. U has been one of
the best-selling Wii U games. Also released in 2013 was the
popular LEGO City: Undercover. In this original lEGO game,
exclusive to Wii U, players assume the role of Chase McCain,
a tough police officer who is a master of disguise.
When the plans for Wii U were announced at the end
of 2011, the stock market was a bit disappointed. Investors
became more optimistic when they were told, at the beginning of 2013, that the global sales of the new console had
reached 3.5 million units by the end of December 2012. The
original Wii sold 3.1 million units over a similar period after
its release in November 2006. however, Figure 2 shows that
Wii U is still behind Nintendo’s two competitors, as was the
case in 2006, and the question now is whether Nintendo
can create another ‘blue ocean’. These concerns about

The Nintendo ‘Wii U’
Source: Kevork Djansezian/Getty Images.

U GamePad is the main controller for the Wii U. It features a
built-in touchscreen, which can either supplement or replicate the game play shown on the main display. When using
the ‘Off TV Play’ function, the controller can act as a standalone screen without the use of a TV.
Table 1 shows the worldwide sales of games consoles (in
millions units) from 2005 to 2012, together with the corresponding market shares, which are illustrated in Figure 2.
The Wii U is available at two prices: basic (US$300 in
US) and deluxe ($350). At these prices Nintendo will make
a loss on selling the hardware, but from the moment the
consumer buys one piece of software, that entire customer
relationship becomes positive, in terms of profits for
Nintendo. The purpose of the business model is to drive
the installation base for the hardware, and then to drive a
strong tie-in ratio with all the software (games).

PART II VIDEO CASE STUDY
Müller: Müller yogurts are penetrating
the US market

Molkerei Alois Müller GmbH & Co. KG or Müller is a multinational producer of dairy products, with headquarters
in the German state of Bavaria. Founded as a family dairy
farm in 1896 by Ludwig Müller, today his grandson Theo
owns the successful business. The Müller group made a

net turnover of €4.7 billion in 2012 and has nearly 21,000
employees worldwide. Müller is mostly well-known for
its yogurts, and in this product area it is market leader in
Germany and the UK, where its most well-known product is
the ‘Müller Corner yogurt’. The name ‘corner’ is in reference
to the design of the product. In 2012 Müller yogurts entered
the US market through a joint venture between PepsiCo
and Müller. The name of the joint venture is ‘Muller Quaker
Dairy’. The Müller Group has subsidiaries in the nearby
European markets, like the UK, Italy and Spain. However,
in most export markets outside Europe, Müller mostly uses
distributors for selling their yogurts to the grocery retailers
in the different countries.

Questions
1 What would be the most important external factors that
would influence Müller’s future sales of yogurts in the
United States?

2 What would be the main reasons why Müller is using a
joint venture solution with PepsiCo (Quaker) for the US
market?
Source: John Carey/Getty Images.

Please look at the video clips at www.pearsoned.co.uk/
hollensen.

Introduction to Part II
Part II looks at the environment in which marketing operates. The marketing environment
consists of a micro-environment and a macro-environment.
The macro-environment consists of the larger societal forces that affect the whole
micro-environment:
Demographic environment: population size and growth trends, age structure of population, changes in family structure.
● Economic environment: income distribution, purchasing power, etc.
● Political environment: laws, government agencies, growth of public interest groups.
●

The ethical, social and environmental aspects and how they affect and shape the marketing
plan will be analysed in Chapter 9.
The micro-environment consists of forces and players close to the firm, such as
customers, suppliers, complementors and competitors. The structure of Part II (see the
diagram above) shows how these players (via Chapter 6) are connected in a value net
approach.
The focus of this part is on the micro-environmental factors and the relationships
between the central players.

The vertical
network

Upstream

Suppliers

2

Section 6.4

R&D

5
Competitors
(Chapter 5)

4
Section 6.6

Production

Section 6.7:
Internal
relationships

Marketing

Downstream

Sales and
service

The structure of Part II

Complementors
Section 6.5

Focal firm

The horizontal
network

3

1

Customers
(Chapter 4)

Section 6.3

114

Part II Assessing the external marketing situation

Chapters 4 and 5 start by analysing the most important issues of two of the most significant players shown in the diagram opposite:
●
●

the customer ‘box’
the competitor ‘box’.

Customers and competitors have been chosen for further analysis because they receive
the most attention among managers in firms. These two types of player are also represented in the model labelled ‘the competitive triangle’ (see Figure 3.3).
Chapter 6 tries to analyse the relationships between the most important players in the
value net.
The analysis in Chapters 4 and 5 contains the more traditional approach to customer
and competitor behaviour and analysis. This forms the basis for the analysis of the relationships between the important players in the micro-environment.
Part I (assessment of the internal conditions) and Part II constitute the input for the
later development of marketing strategies (Part III) and the marketing plan (Part IV) and
its implementation (Part V).

Learning objectives
After studying this chapter you should be able to:
understand why consumers make purchase decisions
identify and discuss the main motives behind buying behaviour in the B2C market
● understand how customers make purchase decisions
● identify the various types of buyer in organisational markets and determine their
distinct needs, wants and motivations
● identify different organisational buying situations
● describe and discuss the organisational buying process
● identify and understand the factors influencing the organisational buying process
● evaluate the roles of members of the buying centre
● understand the link between consumer demand and B2B marketing
● understand what is meant by ‘customisation’
●
●

116

Part II Assessing the external marketing situation

4.1

Introduction

Not-for-profit
organisation
An organisation that
attempts to achieve an
objective other than
profit – for example, relief
of famine, animal rights
or public service.

This chapter deals mainly with the behaviour of customers in the B2C and B2B markets. This
analysis is then used as an input for Chapter 6 (especially section 6.3), where the firm’s relationships with the customers are analysed.
To a producer or service provider, a market is where the product or service is sold or delivered and the profits generated. The seller or marketer defines the market in types of customer.
Thus, a market consists of all the potential customers sharing particular wants and needs who
might be willing to engage in change to satisfy wants or needs. Once the potential customers’
wants and needs are backed by their purchasing power, an actual market is formed.
The market concept applies equally to service. The term ‘market’ can even represent a
powerful concept in the not-for-profit sectors. Although not-for-profit organisations do not
refer to the target population they serve as a market, every not-for-profit organisation has
clients or customers. Hence, in the long run, it is the customers – with their purchasing power –
who will decide what the market really is. They set the boundaries, and their purchases decide
what products or services will remain in the market. Thus, to understand the market, the firm
must understand the customer.
There are different types of customer, depending on whether the firm is approaching the
business-to-consumer market (B2C) or business-to-business market (B2B).
The firm (producer) may not sell directly to the consumers (end-users). Instead, many
firms sell to the B2B market (see Figure 4.1). Here, the firm may serve as a sub-supplier to
other businesses (larger original equipment manufacturers, or OEMs), which may use a firm’s
component in their final product. The differences and similarities between B2B and B2C
markets have long been debated, especially given the dynamic nature of the business environment in both markets. Figure 4.1 summarises some relevant comparisons and the main
characteristics of B2B and B2C.

Reference group
A group of people that
influences an individual’s
attitude or behaviour.

The firm may also have governmental organisations or intermediaries as buyers. Lately,
many Internet firms (such as Amazon and Dell) have begun to cut the distribution chain by
selling directly to consumers.
The outline and structure of this chapter can be illustrated, as shown in Figure 4.2.
In both B2C and B2B markets, the customer decision-making process forms the basis for
the segmentation of the two markets.
Customer decision making is essentially a problem-solving process. Most customers –
whether individual consumers or organisational buyers – go through similar mental processes
in deciding which products and brands to buy. Obviously, though, various customers often
end up buying very different things because of differences in their personal characteristics
(needs, benefits sought, attitudes, values, past experiences and lifestyles) and social influences
(different social classes, reference groups or family situations).
Market segmentation is as important in business markets as it is in the marketing of
consumer goods and services. Segmenting the market may, for example, enable the salesforce
to emphasise different sales arguments in different segments, and the firm can tailor its operations and marketing mix to each segment.

118

Part II Assessing the external marketing situation

Buying centre
A group involved in
the buying decision for
purchasing an item or
system solution for a
company, also known as
a decision-making unit
(DMU). Members of such
a group are normally:
initiator, influencer,
decider, purchaser, user
and gatekeeper.
Influencer
The buying-centre role
played by organisational
members (or outsiders)
who affect the purchase
decision by supplying
advice or information.
Decider
The buying-centre
role played by the
organisational member
who makes the actual
purchasing decision.

Thus, the more marketers know about the factors affecting their customers’ buying behaviour, the greater their ability to design strategic marketing programmes to fit the specific
concerns and desires of these segments. This chapter examines the mental processes that
individual consumers go through when making purchase decisions – and the individual and
environmental factors affecting these decisions. Our discussion provides a useful framework
for choosing, organising and analysing information about current and potential customers for
a particular product or service.
Irrespective of whether the firm is in the B2B or B2C market, the starting point is to define
who the current customers are. The answer is not always obvious, as there may be many
people involved in the purchase and use of a particular product or service. Customers are
not necessarily the same as consumers. A useful way to approach customer definition is to
recognise six main roles that exist in many purchasing situations. Often several, or even all, of
these roles may be held by the same individuals, but recognising each role separately can be a
useful step in targeting marketing activity more accurately.
The roles in this buying centre are as follows.
●

●

●

●

●

●

Decision-making unit
(DMU)
The initiator, the decider,
the influencer, the
purchaser, the gatekeeper
and the users. Often
identical with the buying
centre in B2B.

The initiator: this is the individual (or individuals) who initiates the search for a solution to
the customer’s problem. In the case of the purchase of a chocolate bar, for example, it could
be a hungry child who recognises her own need for sustenance. In the case of a supermarket, the reordering of a particular product line that is nearly sold out may be initiated by a
stock controller, or even an automatic order processing system.
The influencer: influencers are all those individuals who may have some influence on the
purchase decision. A child may have initiated the search for a chocolate bar, but the parents
may have a strong influence on which product is actually bought. In the supermarket the
ultimate customers will have a strong influence on the brands ordered – the brands they
buy or request the store to stock will be most likely to be ordered.
The decider: another individual may actually make the decision as to which product or
service to purchase, taking into account the views of initiators and influencers. This may
be the initiator or the influencer in the case of the chocolate bar. In the supermarket the
decider may be a merchandiser whose task it is to specify which brands to stock, what
quantity to order, and so on.
The purchaser: the purchaser is the individual who actually buys the product or service.
He or she is, in effect, the individual who hands over the cash in exchange for the benefits.
This may be the child or parent for the chocolate bar. In industrial purchasing it is often
a professional buyer who, after taking account of the various influences on the decision,
ultimately places the order, attempting to get the best value for money possible.
The user: now comes the end-user of the product or service – the individual who consumes
the offer. For the chocolate bar it will be the child. For the goods in the supermarket it will
be the supermarket’s customers.
The gatekeeper: this is the person or people within the organisation who can control the
flow of information to other members of the buying centre.

What is important in any buying situation is to have a clear idea of the various people
who are likely to have an impact on the purchase and consumption decision. Where the
various roles are undertaken by different individuals it may be necessary to adopt a different
marketing approach to each. Each may be looking for different benefits in the purchase and
consumption process. Where different roles are undertaken by the same individuals, different
approaches may be suitable depending on what stage in the buy/consume process the individual is at the time.
A central theme of this book is that most markets are segmented; in other words,
different identifiable groups of customers require different benefits when buying or using
essentially similar products or services. Identifying who the various customers are and
what role they play then leads to the question of what gives them value. For each of the
above members of a decision-making unit (DMU), different aspects of purchase and use
may give value.

CHAPTER 4 Customer behaviour

4.2

119

Consumer B2C decision making
Approaches to understanding consumer buying behaviour draw heavily on the other social
sciences.
The company has a strong role to play in designing and providing appropriate stimulation
to the purchase decisions. The process is dynamic as there is an interaction between the buyer
and the environment. The consumer actively participates in the process by searching for
information on the alternatives available, by providing evaluations of products and services
and by expressions of risk. In this process, the company also plays an active role by manipulating the variables that are under its control. The company modifies the marketing mix to
accommodate the demands expressed by consumers. The more successful it is in matching its
marketing mix with expressed and latent demands in the market, the greater the possibility is
that consumers will buy the company’s products – now and in the future. Consumer behaviour is determined by a host of variables studied in different disciplines. Consumer behaviour
may be described using the SPR model – a relationship between a stimulus of some kind, such
as a new product, the way information about the innovation is processed by the consumer and
the response the consumer makes having evaluated the alternatives (see Figure 4.3).
The stimulus is captured by the range of elements in the marketing mix, which the company
can manipulate to achieve its corporate objectives. These stimuli derive from the product or
service itself, or from the marketing programme developed by the company to support its
products and services. A number of symbolic stimuli derive from the use of media such as
television. Stimuli also include many of the conditioning variables discussed above. Chief
among these are the cultural and social influences on consumer behaviour and the role of
reference groups.
Process refers to the sequence of stages used in the internal process of these influences by
the consumer. This sequence highlights the cause-and-effect relationships involved in making
decisions. The processes include the perceptual, physiological and inner feelings and dispositions of consumers towards the product or service being evaluated.

Culture
S

Stimulus

Social influence
Reference group
Marketing mix

Psychological factors
P

Process
(organism)

Physiological factors
Perceptions and feelings

Attitudes and beliefs
R

Response

Buying behaviour
Buying practices

Figure 4.3 The SPR (SOR) model

120

Part II Assessing the external marketing situation

The third component refers to the consumer’s response in terms of changes in behaviour,
awareness and attention, brand comprehension, attitudes, intentions and actual purchase.
This response may indicate a change in the consumer’s psychological reaction to the product
or service. As a result of some change in a stimulus, the consumer may be better disposed
to the product, have formed a better attitude towards it, or believe it can solve a particular
consumption-related problem. Alternatively, the response may be in the form of an actual
change in purchasing activity. The consumer may switch from one brand to another or from
one product category to another. Consumer responses may also take the form of a change in
consumption practices, whereby the pattern of consumer behaviour is changed. Supermarkets frequently offer incentives to get people to shop during slack periods of the week, which
involves a change in shopping practice.
Generally speaking, a great deal of interest is focused on responses that involve buying,
or the disposition to buy. Manufacturers spend considerable sums of money in developing
and promoting their products, creating brands and otherwise designing marketing effort
to influence consumer behaviour in a particular way. At the same time, consumers may be
more or less disposed to these efforts. Through the influence of external stimuli and internal
processing mechanisms, a convergence may occur between consumer wants and needs and
the products and services provided. On other occasions, no such convergence occurs.
It is known, however, that the same degree of interest may not be displayed for all products
and services. For some products and services, consumers like to be heavily involved. Some
purchases are planned, while others are unplanned and may even arise as a result of impulse.
These are among the various outcomes or responses that arise in the stimulus–process–
response model of consumer behaviour.
The decision-making processes consumers use when making purchases will vary. Different
buyers may engage in different types of decision-making processes depending on how highly
involved they are with the product. A high-involvement product for one buyer may be a lowinvolvement product for another.
The decision processes involved in purchasing high- and low-involvement products are
quite different (see Figure 4.4). The following sections examine the mental steps involved in
each decision process in more detail.

Determinants of consumer involvement
Consumer involvement is frequently measured by the degree of importance the product has
to the buyer. Laurent and Kapferer (1985), for example, indicate a number of factors that
influence the degree to which consumers become involved in a particular purchase. The most
important factors are:
●

Perceived risk
Consumers’ uncertainty
about the consequences
of their purchase
decisions; the consumer’s
perception that a product
may not do what it is
expected to do.

●

perceived importance of the product;
perceived risk associated with its use.

The level of involvement with any product depends on its perceived importance to the
consumer’s self-image. High-involvement products tend to be tied to self-image, whereas
low-involvement products are not. A middle-aged consumer who feels (and wants to look)
youthful may invest a great deal of time in her decision to buy a sport-utility vehicle instead
of an estate car. When purchasing an ordinary light bulb, however, she buys almost without
thinking, because the purchase has nothing to do with self-image. The more visible, risky, or
costly the product, the higher the level of involvement.
Involvement also influences the relationship between product evaluation and purchasing
behaviours. With low-involvement products, consumers generally will try them first and then
form an evaluation. With high-involvement products, they first form an evaluation (expectation), then purchase. One reason for this behaviour is that consumers do not actively search
for information about low-involvement products. Instead, they acquire it while engaged in
some other activity, such as watching television or chatting with a friend. This is called passive
learning, which characterises the passive decision-making process. Only when they try the

CHAPTER 4 Customer behaviour

Low perceived importance
of product

High perceived importance
of product

Lower risk of visibility

Higher risk of visibility

Not related to self-image

Related to self-image

Low
involvement

Chocolate bar Soap Soft drink

CD Jeans

Computer Car House

High
involvement

Passive/routine decision making.

Active/complex decision making.

Passive learning.

Active learning.

Consumers seek an acceptable level of satisfaction.
They buy the brand least likely to give them problems
and buy based on a few attributes. Familarity is the key.

Consumers seek to maximize expected satisfaction.
They compare brands to see which provides the most
benefits related to their needs and buy based on a
multi-attribute comparison of brands.

Personality and lifestyle are not related to consumer
behaviour because the product is not closely tied to
the persons’s self-identity and beliefs.

Personality and lifestyle characteristics are related to
consumer behaviour because the product is closely tied
to the person’s self-identity and belief system .

Reference groups exert little influence on consumer
behaviour because products are not strongly related
to their norms and values.

Reference groups influence consumer behaviour
because of the importance of the product to group
norms and values.

Consumers buy first. If they do evaluate brands, it is
done after the purchase.

Consumers evaluate brands before buying.

Managerial implications
Consumers represent a passive audience for product
information.
Build up brand loyalty (the consumer just chooses the
brand that he/she has good experiences with).

product do they learn more about it. In contrast, high-involvement products are investigated
through active learning – part of an active decision-making process – in order to form an
opinion about which product to purchase.

The consumer buying process
For a better understanding of consumer buying behaviour, marketers have broken the
decision-making process into the five steps described below. These are shown in Figure 4.5,
along with a description of how one consumer made a high-involvement purchase. For lowinvolvement purchases, the first three steps may be skipped. As involvement increases, each
step takes on greater importance, and more active learning occurs.

Step 1: Problem identification
Consumers’ purchase-decision processes are triggered by unsatisfied wants or needs. Individuals perceive differences between ideal and actual states on some physical or sociopsychological dimension. This motivates them to seek products or services to help bring their
current state more into balance with the ideal.

Part II Assessing the external marketing situation

Information
search

Evaluation of
alternatives

Low involvement
(some mental steps are skipped)

Problem
identification

High involvement
(all mental steps are gone through)

122

Decision and
purchase

Post-purchase
evaluation

Figure 4.5 The consumer decision-making process

We human beings are insatiable – at least with respect to our sociopsychological needs –
but we are limited by time and financial resources. It is impossible for us to satisfy all our
needs at once. We tend instead to try to satisfy the needs that are strongest at a given time.
The size of the gap between our current and our desired state largely determines the strength
of a particular need.
If you are thirsty, you may simply run out and buy a soft drink. In a high-involvement
purchase the recognition of a need may arise long before it is acted upon. In the case of buying
a house, the cost may prevent you from acting on your need for several years.

Step 2: Information search
Having recognised that a problem exists and might be satisfied by the purchase and consumption of a product or service, the consumer’s next step is to refer to information gained from
past experience and stored in memory for possible later use.
The information search consists of thinking through the situation, calling up experiences
stored in memory (internal search), and probably seeking information from the following:
●

●

●

Personal sources, which include family members, friends and members of the consumer’s
reference group.
Commercial sources – information disseminated by service providers, marketers and
manufacturers and their dealers. These include media advertising, promotional brochures,
package and label information, salespersons and various in-store information, such as
price markings and displays.
Public sources, which include non-commercial and professional organisations and individuals who provide advice for consumers, such as doctors, lawyers, government agencies,
travel agencies and consumer-interest groups. Consumers are usually exposed to more
information from commercial sources than from personal or public sources. Consumers
do, however, use information from different sources for different purposes and at different
stages within the decision-making process. In general, commercial sources perform an
informing function for consumers. Personal and public sources serve an evaluation and
legitimising function.

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123

Each source has its benefits and drawbacks. Because services are intangible, difficult to standardise and their production and consumption are inseparable, they are more difficult to evaluate than products. Thus, most services are hard to assess until they are being consumed after
purchase (e.g. cruises and restaurant meals). Indeed, some services are difficult to assess even
after they have been consumed. Even when products are very expensive and ego-involving,
some consumers are unlikely to conduct an exhaustive search for information before making
a decision. Why? Because of the costs involved. Perhaps the biggest cost for most people is the
opportunity cost of the time involved in seeking information. They give up the opportunity to
use that time for other, more important or interesting activities, such as work.
Another information-search cost is the possible negative consequence of delaying the decision too long. For example, a consumer has only a limited time to decide whether to take
advantage of a special deal offered on a specific cruise. Finally, there are psychological costs
involved in searching for information. Collecting information can be a frustrating task, often
involving crowded stores and rude salespeople. Also, some consumers become frustrated and
confused when they have a lot of complex information to evaluate before making a choice.
Consequently they cut their information search short.

Step 3: Evaluation of alternatives
Consumers differ in their approach to evaluation, but a number of aspects are common.
Products or services are viewed by individuals as bundles of attributes. Consumers find it
difficult to make overall comparisons of many alternative brands because each brand might
be better in some ways but worse in others. Instead, consumers simplify their evaluation task
in several ways. First, they seldom consider all possible brands; rather, they focus on their
invoked set â&#x20AC;&#x201C; a limited number they are familiar with that are likely to satisfy their needs.
Second, consumers evaluate each of the brands in the invoked set on a limited number of
product factors or attributes (see Figure 4.6). They also judge the relative importance of these
attributes, or the minimum acceptable performance of each. The set of attributes used by a
particular consumer, and the relative importance of each, represent the consumerâ&#x20AC;&#x2122;s choice
criteria.

Cars are viewed in terms of transport, safety, prestige, speed and carrying capacity. Some
attributes are more important than others, so consumers allocate different levels of importance weights to each attribute identified. Some buyers will view safety as more important
than speed. The company can divide the market into segments according to the attributes that
are important to different groups.
Consumers tend to develop a set of beliefs about where each product or brand is in regard
to each attribute. This set of beliefs about a particular brand is referred to as the ‘brand image’.
For a particular consumer, the brand image of a BMW may be that it is expensive, reliable and
fast, while the brand image of a Lada may be that it is cheap, plain and slow.

Step 4: The purchase decision
The purchase decision emerges from the evaluation of alternatives. The consumer may decide
not to buy and save the money, or spend it on a different item altogether. Or he or she may
want to play safe by deciding to purchase a small amount for trial purposes, or by leasing
rather than buying. The decision to buy often occurs some time before the actual purchase.
The purchase is a financial commitment to make the acquisition. It may take time to secure a
mortgage or car loan.
Consumers shopping in a retail store intent on purchasing one brand sometimes end up
buying something different. This happens because the consumer’s ultimate purchase can be
influenced by such factors as being out of stock (no outside cabins on a particular cruise), a
special display, or a message from a salesperson (‘I can get you a better deal on a similar cruise
if you can go two weeks later’).

Step 5: The post-purchase evaluation

Cognitive dissonance
Buyer discomfort caused
by post-purchase
conflict.
Demographics
Measures such as age,
gender, race, occupation
and income that are often
used as a basis for selecting focus group members
and market segments.

4.3

The purchase evaluation stage results in satisfaction or dissatisfaction. Buyers often seek assurance from others that their choice was correct. Positive assurance reinforces the consumer’s
decision, making it more likely that such a purchase will be made again. Positive feedback
confirms the buyer’s expectation.
Consumers are more likely to develop brand loyalty to services than to products because of
the difficulty of obtaining and evaluating information about alternative services as well as, in
some cases, the extra costs involved. Also, in some cases repeated patronage brings additional
benefits such as preferential treatment (getting an appointment with your doctor) and the
service provider getting better insights into the consumer’s tastes/preferences.
Even when a product performs as expected, consumers may doubt whether they made the
best possible choice. Such doubts are called cognitive dissonance.
Doubts about whether the best possible purchase has been made can be reduced in two
ways. First, they can simply withdraw from their decision – take the product back and ask for
a refund (difficult to do with a service). A second way to reduce dissonance is for consumers
to be convinced they really did make the best choice. Many people therefore continue to
seek information about their chosen brand after a purchase. Marketers play an active role in
dissonance reduction by reinforcing consumers’ purchase decisions via, for example, followup letters assuring customers they made a wise decision and that the firm stands behind the
product should anything go wrong (Gurley et al., 2005).

Influences on consumers’ decision making

Lifestyle
An individual’s activities,
interests, opinions and
values, as they affect his
or her mode of living.

Even if some consumers have a similar involvement, they buy different brands for different
reasons. Some of the important psychological variables that affect a consumer’s decisionmaking process include needs, perception, memory and attitudes. The consumer’s personal
characteristics, such as demographic and lifestyle variables, influence these psychological
factors (see Figure 4.7).

CHAPTER 4 Customer behaviour

Sociodemographic
variables

125

Social class/demographics

Psychological
variables

Needs

Consumer decision-making
process

Reference
groups/
family

Attitudes

Information
search
Evaluation of
alternatives

Low involvement

Problem
identification

Perception

Lifestyles

Decision and
purchase
Post-purchase
evaluation

Memory

Culture/subculture
Used as a
basis for
Chapter 8
Segmentation
Targeting
Positioning

Maslow ranked the five needs in a hierarchy to indicate that higher-level needs tend to emerge
only after lower-level needs are satisfied.

Perception
Perception is the process by which a person selects, organises and interprets information.
When consumers collect information about a high-involvement product they follow a series
of steps, or a hierarchy of effects. Exposure to a piece of information, such as a new product,
an advert or a friendâ&#x20AC;&#x2122;s recommendation, leads to attention, then to comprehension and finally
to retention in memory. Once consumers have fully perceived the information, they use it to
evaluate alternative brands and to decide which to purchase.
The perception process is different for low-involvement products. Here, consumers store
information in their memories without going through the above-mentioned steps. Exposure
may cause consumers to retain enough information so that they are familiar with a brand
when they see it in a store (Goldstein et al., 2008).
Consumers also tend to avoid information that contradicts their current beliefs and attitudes. This perceptual defence helps them avoid the psychological discomfort of reassessing
or changing attitudes, beliefs or behaviours central to their self-image. For example, many
smokers avoid anti-smoking messages, or play down their importance, rather than admit that
smoking may be damaging their health.

Memory
Consumers are also selective in what they remember. Thus, they tend to retain information
that supports what they believe.
There are different theories of how the human memory operates, but most agree that it
works in two stages. Information from the environment is first processed by the short-term
memory, which forgets most of it within 30 seconds or less because of inattention or displacement by new incoming information. Some information, however, is transferred to long-term
memory, from where it can be retrieved later.
In long-term memory, a vast amount of information may be held for years or even indefinitely. It remains there until replacement by contradictory information through a process
called interference.
Consumers are bombarded with promotional messages. Marketers hope that the more
often their brand name is seen, the more likely consumers will be to process information
about it.

Attitudes
An attitude is a positive or negative feeling about an object (say, a brand) that predisposes a
person to behave in a particular way towards that object.
Attitudes are often described as consumer preferences â&#x20AC;&#x201C; a like or dislike for products or their
characteristics. Marketers usually think of attitudes as having three components: cognitive,
affective and behavioural. The cognitive aspect refers to knowledge about product attributes
that are not influenced by emotion. The affective component relates to the emotional feelings
of like or dislike. The behavioural element reflects the tendency to act positively or negatively.
In other words, attitudes towards purchasing a product are a composite of what consumers
know about its attributes.

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127

Generally, marketers use their knowledge of consumer attitudes to make sure that
strategies are consistent with consumer tastes and preferences. From time to time,
marketers attempt to change consumer attitudes, usually by influencing one of the three
components.

Sociodemographic variables
Age/social class/demographics

Baby boom
The major increase in the
annual birth rate following
the Second World War
and lasting until the
early 1960s. The ‘baby
boomers’, now in their
middle age, are a prime
target for marketers.

The consumer’s age category has a major impact on spending behaviour. For example, older
consumers choose more products related to medical care and travel, and choose fewer products in home furnishings and clothing than do younger age groups; the presence of young
children obviously affects the purchasing of a variety of goods and services. Teenagers spend
a great deal of money on films, soft drinks and fast foods, for example.
The world population will continue to grow. The trend has occurred for two reasons. One
is the lowering of the death rate, and the other is ageing ‘baby boomers’. The baby boom is the
name for the tremendous increase in births that occurred in most Western countries between
1946 and 1965 – the 20 years following the Second World War. The generation born between
1965 and 1976 is often called Generation X. Generation X is smaller than the baby boom
generation, but they are expected to have overtaken baby boomers as a primary market for
many product categories in the 21st century. Another group of consumers came into being
between 1977 and 1995, when adult baby boomers began having children – creating an ‘echo’
of the baby boom. The oldest members of this group are in their mid-to-late thirties. We will
use the term Generation Y for this group. They are growing up very accustomed to computers
and the Internet.
Marketers increasingly look at social class from a global perspective. In some societies –
such as India and Brazil – class distinctions are clear, and status differences are great. In
others – such as Denmark and Canada – differences are less extreme. In countries with
strong class differences, where people live, the cars they drive, the types of clothing they
wear, how much they travel and where they go to college are largely determined by social
class.
In a country with a more homogeneous class structure, such as Sweden or Denmark, it is
not uncommon for executives from all levels to work as a team so, for example, Americans of
various ranks are accepted as well.

Lifestyles
Two people of similar age, income, education and even occupations do not necessarily live
their lives in the same way. They may have different opinions, interests and activities. As a
result, they are likely to exhibit different patterns of behaviour – including buying different
products and brands and using them in different ways for different purposes. These broad
patterns of activities, interests and opinions – and the behaviours that result – are referred to
as lifestyles. To obtain lifestyle data, consumers are asked to indicate the extent to which they
agree or disagree with a series of statements having to do with such things as price consciousness, family activities, spectator sports, traditional values, adventurousness and fashion. Lifestyle topologies have been developed by researchers in other countries.

Culture/subculture
Culture has perhaps the most important influence on how individual consumers make buying
decisions. Culture is the set of beliefs, attitudes and behaviour patterns shared by members of
a society and passed on from one generation to the next. Cultural values and beliefs tend to
be relatively stable over time, but they can change from one generation to the next in response
to changing conditions in society.

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Part II Assessing the external marketing situation

Subculture
A group within a
dominant culture that is
distinct from that culture.
Members of a subculture
typically display some
values or norms that
differ from those of the
overall culture.

Cultural differences create both problems and opportunities for international marketers,
particularly for such products as food and clothes. By taking cultural values into account,
companies adjust to the particular customs of people in different countries. Values are the
shared norms about what it is right to think and do. They reflect what society considers to be
worthy and desirable. Marketers need to understand values so their actions are not counter to
what consumers in a given market consider to be acceptable.
A subculture is a group of people with shared values within a broader culture. There
are many groups of people in the USA (such as Hispanics and Jews) who share common
geographic, ethnic, racial or religious backgrounds. They continue to hold some values, attitudes and behaviour patterns that are uniquely their own.

Reference groups/family
All consumers live with, depend on and are nurtured by other people. We influence and are
influenced by those with whom we have frequent contact – friends, colleagues and family
members. We are also influenced by people we know only indirectly through the mass
media.
Reference groups are people whose norms and values influence a consumer’s behaviour
(Kotler, 2000).

The family
The family is especially important to marketers because it forms a household, which is the
standard purchase and consumption unit.
How does the family make buying decisions? Here the marketers generally look at three
important aspects:
1 How do families make decisions as a group?
2 What roles can various members play in a purchase decision?
3 How does family purchase behaviour change over time?

Joint decisions
Decisions made that are
shared by all or some
members of a group.
Often, one decision
maker dominates the
process.

In research on families of European descent, Lee and Collins (2000) found that several coalitions emerged in family decisions.
In particular, fathers and daughters appeared to work together, especially older daughters
(aged between 12 and 19). However, this coalition was weakened when there were two daughters in the family, as the daughters seemed to side with their mother against the only male
in the family. Also, mothers and sons seemed to work best together, particularly when there
were two sons in the family. There is also evidence that this coalition was strong where it was
a son who was the oldest child. It seemed to be the older daughters who were the key players
in this family interaction.
The marketing implications of Lee and Collins (2000) are as follows. In order to increase
the effectiveness of promotional campaigns towards families, marketers must examine the
relative influence of family members at each stage of the decision-making process for each
product category under consideration. It is suggested that segmentation of some family
markets on the basis of the type of household structure and demographics may also be useful.
Further, during the development of promotional campaigns, marketers may wish to direct
messages regarding decision making to family members who dominate particular stages of
the decision process.
The influence of various family members varies substantially across countries. Generally
speaking, the more traditional the society, the more it is men who hold the power. In the more
egalitarian countries – such as the Scandinavian countries – decisions are more likely to be
made jointly. As women become better educated and have more buying power in Europe and
Japan, more joint decisions will happen.
Not all families consist of a mother, a father and children. Some households consist of only
one person, or several non-relatives, or a single parent with children (see Exhibit 4.1).

CHAPTER 4 Customer behaviour

129

EXHIBIT 4.1
Example of loyalty: store loyalty versus brand loyalty
The following data is based on a household panel survey by GfK Nürnberg.
Many consumers describe themselves as more store loyal than brand loyal. Figure 4.8 shows both. Brand loyalty is
drawn on the x-axis and is measured as the share of all purchases within a product group taken by the most preferred
brand. Store loyalty is measured similarly, as the number of visits to the most preferred outlet expressed as a proportion of all shopping trips undertaken for any one product category.

Above the bisecting line, store loyalty is higher than brand loyalty, and this case applies above all to product
categories where impulse buying is very common: sweets, snack products, yogurts, chocolates, etc. Nevertheless,
brand loyalty in these product categories is still relatively high, at around 50 per cent. Very high rates for brand loyalty
can be seen for products like cereals, soups, potato products, sauces, dog food, coffee and other products typically
purchased repeatedly; loyalty rates reach 80 per cent and higher. Brand loyalty for these products is generally a little
bit higher than store loyalty, but all in all we have to conclude that loyalty is a widespread phenomenon.
Source: Adapted from Hennig-Thurau and Hansen (2000), p. 37.

Family life cycle (FLC)
Family life cycle
A series of time stages
through which most
families pass.

The family life cycle describes the progress a household makes as it proceeds from its beginning to its end. Each stage reflects changes in a unit’s purchasing needs and, hence, the difference in expenditure patterns – for instance, young married couples without children (DINKs =
double income no kids) are often very affluent because both spouses work. They are a major
market for luxury goods, furniture, cars and vacations (Weiss, 2000).
Dent (1999) describes how every generation of consumers makes predictable purchases
over the course of their lifetime. At the age of 47, consumers finally reach their spending

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Part II Assessing the external marketing situation

Peak in
spending
Vacation
homes,
resorts

Spending

Trade-up
homes

Apartments
Shopping
centres

Starter
homes
Retirement
homes

Offices
Colleges

20

24

Consumer life cycle

28

32

36

40

44

48

52

56

60

64

68

Age

Figure 4.9 Key consumer expenditure/investment

peak, after which children leave home and family spending declines. Fortunately, investors
can capitalise on this spending curve by matching large generational cohorts to their anticipated behaviour in the marketplace (see also Figure 4.9).

Social networks
A social network is a collection of interconnected people.
Social networks comprise points (people and potential customers), and connections
be­­tween those points. These connections may be manifested in many different forms. Examples include:
●
●
●
●

email exchange;
SMS exchange;
purchases;
telephone calls.

Today, online social network services are very popular. They focus on building online
communities of people who share interests and/or activities, or who are interested in
exploring the interests and activities of others. Most social network services are Web based
and provide a variety of ways for users to interact, such as email and instant messaging
services.
Social networking has encouraged new ways to communicate and share information.
Social networking websites are being used regularly by millions of people.
The main types of social networking services are those that contain category divisions
(such as former school-year or classmates), means to connect with friends (usually with
self-description pages) and a recommendation system linked to trust. Popular methods now
combine many of these, with Facebook, MySpace, Twitter and LinkedIn used worldwide.
So now that we have identified the possible social network models, what is the next step?
The second step is isolating those network members worth investing our marketing efforts
in. In other words, out of the potential customer base, we need to determine whom are the
opinion leaders.

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131

Identifying opinion leaders
Opinion leaders are network members regarded as having relevant knowledge, and who are
probably the first ones to be consulted in regards to purchasing decisions.
Usually, most opinion leaders possess one or more of the following characteristics:
●
●

Early adopter
A member of the group of
consumers who purchase
a product soon after it
has been introduced, but
after the innovators have
purchased it.

●
●

part of a social network;
good communicators;
usually early adopters of products or services;
information hungry.

There are different technological tools that can help identify the opinion leaders among our
customers.
Now that we have identified the opinion leaders and their connections within the social
network, we can divert all of our marketing efforts to focus on those specific customers,
assuming that they, in turn, will spread the word to other network members. This way, we can
reduce marketing costs and refocus our resources more effectively.
Once we fully understand the social networks surrounding us and learn to identify the
opinion leaders within those networks, we will be able to establish suitable marketing strategies that will spontaneously produce word-of-mouth marketing.
Additionally, we will also be able to allocate our financial resources towards strengthening
connections with opinion leaders and recruit them as advocates for our business (Doyle, 2007).

EXHIBIT 4.2
Brand-switching strategy in times of recession – the case of Skoda Superb
In a tough economic climate, consumers are less willing to spend on expensive items such as cars and homes. But
Volkswagen-built brand Skoda is hoping that the ‘switch’ strategy for its new model, the Superb, will encourage
consumers who would normally buy more pricey car brands to try a Skoda instead. The first generation of Skoda
Superbs dates back to another global period of economic depression – the 1930s. They initially sold well, although
the poor reputation of the Skoda brand in many countries, where it was seen as unreliable, persisted – until an ad
campaign in the late 1990s persuaded consumers to laugh at their own preconceptions about the brand. Today, Skoda
is the type of car brand that will fit well with consumer desires for cheaper products in a depressed economic environment. It has a well-established value proposition because it is competently built with good technology, thanks to
its association with Volkswagen. A Skoda is a car that is great value for money – a recession may not affect its sales as
badly as more upper- to middle mass-market brands. It is aiming to get consumers switching from brands such as Ford
or Honda.
Source: Adapted from Hosea (2008).

4.4

Organisational B2B decision making

Derived demand
Demand for a product
that depends on demand
for another product.

The marketing of goods and services to other businesses, governments and institutions is
known as business-to-business marketing. It includes everything but direct sales to consumers.
The products are marketed from one organisation to another, until the one at the end of the
chain sells to the final consumer.
Organisational markets consist of all individuals and organisations that acquire products
and services that are used in the production of products and services demanded by others.
The demand for most products and services arises because of a derived demand for the

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Part II Assessing the external marketing situation

finished products and services that the company produces. About half of all manufactured
goods in most countries are sold to organisational buyers.
The market behaviour, which affects the demand for industrial products and services, is
generally quite different from that experienced in consumer markets. The differences arise
mainly in regard to the behaviour of industrial buyers, the types of product and service
purchased and the purposes for which they are purchased.
Buying is performed by all organisations: manufacturing firms, service firms and not-forprofit organisations in the public and private sectors. Organisational buying is a complex process,
which may be divided into a number of stages taking place over time. People with different
functional responsibilities are usually involved in the industrial buying process. Their influence
varies at the different stages, depending on the product or service being purchased. In broad
terms, organisational buying is influenced by factors in the environment, by the nature and
structure of the organisation itself and by the way the buying centre in the company operates.
There is a strong correlation between the level of a countryâ&#x20AC;&#x2122;s economic development and its
demand for industrial goods and services. Thus, countries with a basically agrarian economy
demand mainly farm equipment and supplies, plus public sector purchases including military
equipment and supplies. This is in contrast with highly developed countries, which are strong
markets for high-technology products.

Identifying buyers in organisational markets
Buyers in organisational markets are typically manufacturers, intermediaries or customers in
the public sector. To identify them it may be necessary to segment the market.

Manufacturers as customers
Manufacturers buy raw materials, components and semi-finished and finished items to be
used in the manufacture of final goods. Manufacturers tend to be concentrated in particular
areas of a country, and hence may more easily be served than consumer markets where the
population is dispersed. Furthermore, buying power for certain products tends to be concentrated in a few hands, since a few manufacturers frequently account for most of the production of specific industrial products.

Intermediate customers (resellers)

Wholesaler
An organisation or
individual that serves as
a marketing intermediary
by facilitating transfer
of products and title to
them. Wholesalers do
not produce the product,
consume it or sell it to
ultimate consumers.
Packaging
An auxiliary product
component that includes
labels, inserts, instructions,
graphic design, shipping
cartons and sizes and
types of containers.

Intermediate customers are organisations that buy and sell to make a profit. They are sometimes referred to as â&#x20AC;&#x2DC;resellersâ&#x20AC;&#x2122;. Normally they make very few changes to the products handled.
Wholesalers and retailers are the largest intermediaries in this market, but other specialised
distributors also exist, which may also provide additional services.
Intermediate customers are also concerned with the derived demand further down the
distribution channel for the products they carry. They are particularly concerned about
product obsolescence, packaging and inventory requirements, since all three variables are
important considerations in their financial well-being.

Public sector markets
The public sector market is in reality myriad markets. It consists of institutional markets such
as schools, hospitals, prisons and other similar public bodies. It also consists of direct sales
to government departments such as the health service and education departments. In most
countries with an active public sector, the annual budgets of many of these institutions can be
larger than the expenditure of organisations in the private sector.

Public sector tendering procedures
Many different purchasing terms are used in public sector purchasing, but it is possible to
establish two broad categories of these. The first category contains terms that refer to the

CHAPTER 4 Customer behaviour

133

extent of the publicity given to a particular public sector tender or contract, while the second
category contains terms based on the discretion available to the awarding authority within the
public service itself.
Where it is judged that many suitable qualified suppliers exist, the publicity given to a
particular tender notice is widespread. The opposite is the case where the number of potentially suitable suppliers is limited. Three tendering procedures, each implying a different level
of publicity, may be identified:
●
●
●

open tendering
selective tendering
private contracting.

Open tendering procedures arise when an invitation to tender is given the widest publicity.
In this situation, an unlimited number of suppliers have the opportunity of submitting bids.
Selective tendering procedures occur when the invitation to tender is restricted to a predetermined list of suppliers. In this case, the invitation to tender normally takes the form of invitations sent to these suppliers. Private contracting procedures refer to the situation where the
awarding authority contacts suppliers individually, usually a single supplier.

Buying situations

Modified rebuy
A purchase where the
buyers have experience
in satisfying the need, but
feel the situation warrants
re-evaluation of a limited
set of alternatives before
making a decision.
Straight rebuy
A type of organisational
buying characterised by
automatic and regular
purchases of familiar
products from regular
suppliers.

B2B buying behaviour is influenced by two overall organisational considerations. Organisations that have significant experience in purchasing a particular product will approach the
decision quite differently from first-time buyers. Therefore, attention must centre on buying
situations rather than on products. One firm may see the purchase of a new computer as a
new task because of the firm’s lack of experience in this area, whereas another firm may see
the same situation as a modified rebuy. Therefore, a marketing strategy must begin with
identifying the type of buying situation the buying firm is facing.
Three types of buying situations have been delineated: new task, modified rebuy and
straight rebuy.

New-task buying
This occurs when an organisation faces a new and unique need or problem – one in which
buying centre members have little or no experience in buying and, thus, must expend a great
deal of effort to define purchasing specifications and to collect information about alternative
products and vendors. Each stage of the decision-making process is likely to be extensive,
involving many technical experts and administrators. The supplier’s reputation for meeting
delivery deadlines, providing adequate service and meeting specifications is often a critical
factor in selling a product or service to an organisation for the first time. Because the buying
centre members have limited knowledge of the product or service involved, they may choose
a well-known and respected supplier to reduce the risk of making a poor decision.
When confronting new-task buying, organisational buyers operate in a stage of decision
making referred to as extensive problem solving. The buyers and decision makers lack welldefined criteria for comparing alternative products and suppliers, but they also lack strong
predispositions towards a particular solution.

A modified rebuy
This occurs when the organisation’s needs remain unchanged, but buying centre members
are not satisfied with the product or the supplier they have been using. They may desire a
higher-quality product, a better price or a better service. Here buyers need information about
alternative products and suppliers to compare with their current product and vendor. Modified rebuys present good opportunities for new suppliers to win an organisation’s business if
they can offer something better than the firm’s current vendor.

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Part II Assessing the external marketing situation

Limited problem solving
An intermediate level of
decision making between
routine response
behaviour and extensive
problem solving, in which
the consumer has some
purchasing experience
but is unfamiliar with
stores, brands or price
options.

Limited problem solving best describes the decision-making process for the modified
rebuy. Decision makers have well-defined criteria, but are uncertain about which suppliers can
best fit their needs. In the consumer market, college students buying their second computer
might follow a limited problem-solving approach.

A straight rebuy
This involves purchasing a common product or service the organisation has bought many
times before. Such purchases are often handled routinely by the purchasing department with
little participation by other departments. Such purchases are almost automatic, with the firm
continuing to purchase proven products from reliable, established vendors. In straight rebuy
situations, all phases of the buying process tend to be short and routine. Even so, when large
quantities are involved, the need for quality assurance, parity pricing and on-time delivery to
minimise inventory requires a competent salesforce to help the supplier maintain a continually satisfying relationship with the buyer over time. Indeed, the rapid spread of computerised
reordering systems, logistical alliances and the like have made the development and maintenance of long-term relationships between suppliers and their customers increasingly important in the purchase of familiar goods and services.
For routine purchases or straight rebuys, the Internet is being used to streamline the
purchasing process. To this end, firms are adopting electronic (e)-procurement systems,
joining trading communities or turning to electronic marketplaces that have been designed
specifically for their industry (for example, buying steel in the car industry).
Routine problem solving is the decision process organisational buyers employ in a straight
rebuy. Organisational buyers have well-developed choice criteria to apply to the purchase
decision. The criteria have been refined over time as the buyers have developed predispositions towards the offerings of one or a few carefully screened suppliers.

The buy grid model
Buy grid model
The organisational buying
process – consisting
of eight buying stages –
can be mapped like a
grid, where the other
dimension is the
complexity of the buying
(new task, modified
rebuy or straight rebuy).

The buying process always begins when someone in the organisation recognises a problem
that can be solved by a purchased product or service (Figure 4.10: the extended buy grid
model). Sometimes the problem is nothing more than the company running out of regularly purchased items, in which case the purchasing professional determines the quantity needed and reorders the product or service. This would be a straight rebuy situation.
Recognising the problem (stage 1), determining the product and quantity (stage 3), and
evaluating the performance of the product or service (stage 8) are found in all three types
of buying situation. Therefore, a minimum of three stages is found in all organisational
purchases.
The ‘new task’ situation is the most complex buying situation and therefore involves all
eight buying stages. As we go to the right of Figure 4.10 some of the buying stages are left out
because of the reduced complexity of the buying situation. We find the least number of buying
stages in a straight rebuy.
Figure 4.10 also suggests that some activities at each stage, and their execution, differ. More
people are involved in organisational purchase decisions, the capability of potential suppliers
is more critical and the post-purchase evaluation process is more formalised. We will examine
other unique features of each stage of the organisational purchase decision process next.

1 Recognition of a problem or need
The organisational purchasing process starts when someone in the firm recognises a need that
can be satisfied by buying some product or service. Thus, while consumers may buy things
impulsively to satisfy psychological or social needs, most organisational purchases are motivated by the needs of the firm’s production processes and its day-to-day operations.
An organisation’s demand for goods and services is a derived demand, which, as we
noted earlier, comes from its customers’ demands for the goods and services it produces.
Fluctuations in economic conditions can produce change in the sales of an organisation’s

CHAPTER 4 Customer behaviour

135

Buying situation
Characteristics

New
task

Modified
rebuy

Straight
rebuy

Buying stages
1

Recognition of a problem/need

Always

Always

Always

2

Determination of characteristics and
quantity of needed products/services

Always

Sometimes

Never

3

Determination of the product/service
desired and quantities needed

Always

Always

Always

4

Search for potential suppliers and
preliminary evaluation of their suitability

Always

Sometimes

Never

5

Acquisition and initial analysis of
proposals (samples) from suppliers

goods or services, which in turn can result in rapid changes in production schedules and
in accumulations or depletions in the firm’s materials and parts inventories. As a result, the
organisation’s purchase requirements for materials and parts can change dramatically in a
short time.
In some cases, need recognition may be almost automatic, as when a computerised inventory control system reports that an item has fallen below the reorder level or when a piece of
equipment wears out. In other cases, a need arises when someone identifies a better way of
carrying out day-to-day operations. For example, a production engineer might recommend
the purchase of a new machine that would increase production and thus reduce costs.
Changes in the company’s strategy, resulting in a need for producing a new product line,
may also result in a ‘new task’ buying situation. Needs then may be recognised by many
people within the organisation, including users, technical personnel, top management and
purchasing agents.
Instead of simply monitoring inventories and reordering when they run low, some firms
attempt to forecast future requirements so as to plan their purchases in advance.
Requirements planning governs the purchase of raw materials and fabricating components
as well as supplies and major installations. One result of such planning is the signing of longterm purchase contracts, particularly for products projected to be in short supply or to have
a projected increase in price. Requirements planning can also lead to lower costs and better
relations between a buyer and their suppliers.

136

Part II Assessing the external marketing situation

2 Determination of characteristics and quantity of needed product or service
The need for particular goods and services is usually derived from a firm’s production or
operation requirements and, therefore, must meet specific technical requirements. Technical experts from the firm’s R&D, engineering and production departments are thus often
involved early in the purchase decision. When the firm needs a unique component or piece
of equipment, it might even seek help from potential suppliers in setting the appropriate
specifications. For example, car manufacturers consult their parts suppliers before finalising other specifications for a new model. Indeed, as we have seen, B2B marketers increasingly involve major customers in the process of developing new products and product
improvements to help ensure that those items will meet the needs and specifications of
potential buyers.
3 Determination of the product or service desired and quantities needed
When specifications for the desired product or service are to be determined, purchasing (and
possibly other departments) may perform a value analysis. This systematic appraisal of an item’s
design, quality and performance requirements helps to minimise procurement costs. It includes
an analysis of the extent to which the product might be redesigned, standardised or processed using cheaper production methods. A cost analysis that attempts to determine what the
product costs a supplier to produce is also part of a value analysis. Such information helps the
purchasing agent better evaluate alternative bids or negotiate favourable prices with suppliers.
Sometimes a firm has the option of making some components or performing some
services internally (‘make’), or buying them from outside suppliers (outsourcing). See also
section 3.8 for a further discussion of outsourcing.
Economic considerations typically dominate such decisions, although in the long term
other factors may be important (for instance, overdependence on a single supplier).
4 Search for potential suppliers and preliminary evaluation of their suitability
and qualifications
Once the specifications and workable solutions have been determined and precisely described,
the buying organisation searches for alternative sources of supply. Here the purchasing department can exercise much influence, as it provides most of the data for possible vendor sources.
Figure 4.11 illustrates a process for screening potential suppliers.

Firm policy:
– Screening out potential suppliers who do
not fit into the supplier portfolio and the
supplier policy of the firm
Cooperation between the firm and the supplier:
– There should be a fit between the
‘company values’ of the two firms
– Both firms should be able to benefit from
the cooperation
‘Hardcore’ screening (weights, scores)
Evaluation of supplier capabilities: production,
technical support, R&D (number of new product
introductions per year) etc.
(see also Figure 4.12)

Choice of a supplier

Figure 4.11 Screening of potential suppliers

CHAPTER 4 Customer behaviour

Trade show
A meeting or convention
of members of a
particular industry where
business-to-business
contacts are routinely
made.

137

If new potential suppliers are involved, the purchasing department typically engages in an
in-depth investigation before qualifying that firm as a potential supplier. Such an investigation would include information such as the firm’s finances, reputation for reliability and the
ability to meet quality standards, information that can be obtained from personal sources
(such as salespeople, trade shows, other firms and consultants) and non-personal sources
including catalogues, advertising and trade literature.
For existing suppliers, the firm may evaluate the performance quite frequently, and there is
often considerable information about that supplier’s quality of performance on file.

5 Acquisition and initial analysis of proposals (samples) from suppliers
Requests for specific proposals are made to qualified vendors in this phase. In a straight rebuy
situation, the buyer may simply contact the chosen vendor to obtain up-to-date information
about prices, delivery times and mode of shipment, so phases 4 and 5 may be skipped. For
modified rebuys, more time might be spent on the analysis of the proposals submitted. New
task buys probably would take the most time, and months may go by before a final decision
is made.
6 Evaluation of proposals and selection of supplier(s)
Like individual consumers, organisational buyers evaluate alternative suppliers and their
offerings by using a set of choice criteria reflecting the desired benefits. The criteria used
and the relative importance of each attribute vary according to the goods and services being
purchased and the buyer’s needs. Always important is the supplier’s ability to meet quality
standards and delivery schedules. Price is critical for standard items such as steel desks and
chairs, but for more technically complex items, such as computers, a broader range of criteria
enters the evaluation process and price is relatively less important.
The various potential suppliers and their proposals are then analysed to determine which
vendor or vendors can best match the product or service specifications and the desired price
and delivery requirements. Subsequent negotiations may be needed to produce the desired
results relative to prices, delivery and long-term commitment or other aspect of the vendor’s
proposal. Personal tastes and personalities cannot be ruled out, but the company that is well
liked and can give the customer the best overall product and service will generally win the
order, plus the strong possibility of a long-term partnering relationship.
Another factor that can influence the selection of suppliers is reciprocity, which occurs
when an organisation favours a supplier that is a customer or potential customer for
the organisation’s own products or services. Although this situation sometimes causes
inappropriate bonds between buyer and supplier, it can also develop into a rewarding
long-term partner relationship. An example of Chrysler’s supplier evaluation is given in
Figure 4.12.
7 Selection of an order routine
After the selection of supplier, orders are forwarded to the vendor and status reports are sent
to the user department. The inventory levels will be established, and the just-in-time routines
will be determined, if such a possibility exists. The user department views this phase as just
the beginning. Delivery, set-up and training, if necessary, will then happen.
A good proportion of all industrial buying involves a purchasing contract. This streamlines
the buying decision, making it a straight rebuy situation.
Contracts such as these enable a firm to standardise its purchasing activities across
many locations. They can also introduce cost savings through scale economies (quantity
discounts) and a reduction in paperwork. One problem with long-term legal contracts,
though, is that they must specify precisely all the details of a purchase agreement, including
product specifications, prices, credit terms, etc. But, in today’s rapidly changing economic
and technical environments, it can be difficult for the parties to foresee accurately what
their needs and market conditions will be like months or years into the future. And it can be
difficult to adjust the terms of a contract in response to unforeseen product improvements,

market conditions or cost improvements. Such inflexibility is one reason for the recent
popularity of more informal relationships and alliances between suppliers and their major
customers – relationships based more on flexibility and trust between the parties than on
detailed legal contracts.

8 Performance review, feedback and evaluation
When a purchase is made and the goods delivered, the buyer’s evaluation of both product and
supplier begins. The buyer inspects the goods on receipt to determine whether they meet the
required specifications. Later, the department using the product judges whether it performs
to expectations. Similarly, the buyer evaluates the supplier’s performance on promptness of
delivery and post-sales service.
In this phase, the user department determines whether the purchased item has solved the
original problem. Because this time can be a difficult phase for the vendor (since some of the

CHAPTER 4 Customer behaviour

Key account
management (KAM)
An approach to selling
that focuses resources
on major customers
and uses a team selling
approach in taking care
of the total relationship
with such an important
customer.

139

variables are not completely controlled by the vendor), it behoves the buying organisation to
analyse the performance and provide feedback to all the interested parties for further evaluation. Feedback that is critical of the chosen vendor can cause the various members of the
decision-making unit to re-examine their views. When this re-examination occurs, views
regarding previously rejected alternatives become more favourable.
In some organisations this process is done formally, with written reports being submitted
by the user department and other persons involved in the purchase. This information is
used to evaluate proposals and select suppliers the next time a similar purchase is made.
This formal evaluation and feedback process enables organisations to benefit from their
purchasing mistakes and successes.
In other organisations (especially in SMEs with limited personnel resources), step 8 is done
more informally.
The steps in the buying process described above apply primarily to ‘new task’ purchases,
where an organisational customer is buying a relatively complex and expensive product or
service for the first time. At the other extreme is the ‘straight rebuy’, where a customer is
reordering an item it has purchased many times before (office supplies, bulk chemicals).
Such repeat purchases tend to be much more routine. Straight rebuys are often carried out
by members of the purchasing department with little participation by other employees, and
many of the activities involved with searching for and evaluating alternative suppliers are
dropped. Instead, the buyer typically chooses from among suppliers on an ‘approved’ list,
giving weight to the company’s past satisfaction with those suppliers and their products and
services.
From the seller’s viewpoint, being an approved supplier can provide a significant
competitive advantage, and policies and procedures should be developed to help maintain
and develop such favoured positions with current customers. Many firms have developed
key account management programmes (see section 10.7) and cross-functional customer
service teams to help preserve the long-term satisfaction of their largest customers. Also,
suppliers are offering new technologies – such as Internet-based reordering systems – and
forming alliances with their customers to help them make their reordering process more
efficient, while simultaneously increasing the likelihood they will continue to reorder from
the same supplier.
For potential suppliers not on a buyer’s approved list, the strategic marketing problem is
more difficult. A non-approved supplier’s objective must be to move the customer away from
the automatic reordering procedures of a straight rebuy towards a situation where the buyer
is willing to consider new suppliers.

Kraljic’s purchasing model
The purchasing function has a substantial impact on the total cost to a firm and thereby on
the potential profit. Choosing the right suppliers has become increasingly important as they
account for a large part of the value creation related to the buying firm’s products and services. Thus, managing the firm’s supplier base is becoming an essential strategic issue. Kraljic’s
(1983) model aims at matching external resources provided by suppliers with the internal
needs of the buying firm.
In this portfolio, the perceived importance and complexity of a purchasing situation is
identified in terms of two factors: profit impact and supply risk Figure 4.13. Profit impact
includes such elements as the (expected) monetary volume involved with the goods and/or
services to be purchased and the impact on (future) product quality. Indicators of supply risk
may include the availability of the goods or services under consideration and the number of
potential suppliers. Depending on the values of these factors, purchases (and therefore the
related supplier selection decisions) can be grouped according to Kraljic’s classification into
strategic, bottleneck, leverage and routine purchases.
Let us try to relate the buying situation in the buy grid model (Figure 4.10) to the four
categories in Kraljic’s model (Figure 4.13).

Leverage items typically involve modified rebuy situations. There are many suppliers to
choose from, while the high value (and saving potential) of the items justifies a proactive
search and frequent selection of suppliers. However, the execution of the first steps in the
process (problem definition, formulation of criteria and prequalification) is often decoupled
from the final choice. The first three steps result in the so-called approved vendor lists. Final
(frequent) choices are made from these approved vendor lists.
In case of a routine item, there are many suppliers that could supply the item. However,
because of the low value of the item, it will not pay for the firm to search frequently for
and select suppliers. Moreover, usually a whole set of related routine items (e.g. stationery)
is assigned to one (or two) suppliers in order to achieve a highly efficient ordering and
administration procedure. The choice of the supplier is fixed for a reasonable period of time.
Intermediate changes in the desired or required items are dealt with by the current supplier.
Irrespective of such specific changes in the items requested and/or actually purchased, the
appropriateness of the supplier is typically reconsidered periodically and, if necessary, a new
(adaptive) selection will take place.
In case of bottleneck and strategic items, the choice of the supplier is also more or less fixed.
Small changes in the specification of the items are automatically dealt with by the existing
supplier. However, the reason for this is very different from that in the routine case. In these
cases with a high supply risk, there are virtually no suppliers to choose from immediately,
either because of a unique specification (i.e. a very strong resource tie between the buying
company and the supplier) or because of the scarcity of the material. As a result, the choice set
is often much smaller. Decision models are primarily used as means for periodic evaluation
(monitoring) of the existing supplier.
The framework implicitly also addresses the impact of (inter-firm) relationships between
the buyer and the seller on the selection process and the use of decision models. Depending
on the substance and the strength of the relationship, the nature of the decision alternatives
may differ. For example, in new task situations, where it is unlikely that the buying company
has ever been in contact with the suppliers, the decision alternatives are primarily shaped
by the offerings of these suppliers â&#x20AC;&#x201C; i.e., the products or services they produce. In modified
rebuys and especially in straight rebuys for strategic and bottleneck items, however, the interaction between buyer and supplier is likely to be more intense and relationships may have
been going on for a long time.

CHAPTER 4 Customer behaviour

4.5

141

Influences on the buying process

Organisational buying
behaviour
The decision-making
activities of organisational
buyers that lead to
purchases of products.

In this chapter we have already seen how the buying situation influences the B2B buying
process.
The eight-stage model of the organisational buying process Figure 4.14 provides the foundation for explaining other forces that influence a particular buying decision of an organisation. Figure 4.14 shows how organisational buying behaviour is influenced by four major
categories of forces. The four major forces are:
1
2
3
4

environmental forces (e.g. growth rate of the economy)
organisational forces (e.g. the size of the buying)
group forces (e.g. the influence of the buying centre)
individual forces (e.g. personal preferences).

Environmental forces
A projected change in business conditions, a technological development or a new piece of
legislation can drastically alter organisational buying plans. Such environmental influences
define the boundaries within which buyerâ&#x20AC;&#x201C;seller relationships develop in the business market.

Environmental forces

1 Recognition of a problem/need

2 Determination of characteristics and quantity
of needed product/service

3 Determination of the product/service desired
and quantities needed

4 Search for potential suppliers and preliminary evaluation
of their suitability and qualifications
Individual
forces

5 Acquisition and initial analysis of proposals
(samples) from suppliers

Economic influences
Because of the derived nature of industrial demand, the marketer must also be sensitive to the
strength of demand in the ultimate consumer market. The demand for many industrial products fluctuates more widely than the general economy. Firms that operate on a global scale
must be sensitive to the economic conditions that prevail across regions. A wealth of political
and economic forces dictate the vitality and growth of an economy.
The economic environment influences an organisation’s ability and, to a degree, its
willingness to buy. However, shifts in general economic conditions do not affect all
sectors of the market evenly. For example, a rise in interest rates may damage the housing
industry but may have minimal effect on industries such as paper, hospital supplies and
soft drinks. Marketers that serve broad sectors of the organisational market must be
particularly sensitive to the differential impact of selective economic shifts on buying
behaviour.

Technological influences
Internet
A worldwide network of
interconnected computer
networks that carry data
and make information
exchange possible.
e-commerce
Electronic commerce or
business dealings using
electronic media, such as
the Internet.
Product life cycle (PLC)
The course of a product’s
sales and profits over
its lifetime. It involves
five distinct stages:
product development,
introduction, growth,
maturity and decline.

Rapidly changing technology can restructure an industry and dramatically alter organisational buying plans. Notably, the Internet and e-commerce have changed the way firms and
customers (whether they be consumers or organisations) buy and sell to each other, learn
about each other and communicate.
The marketer must also actively monitor signs of technological change and be prepared to
adapt the marketing strategy to deal with new technological environments.
Because the most recent wave of technological change is as dramatic as any in history, the
implications for marketing strategists are profound and involve changing definitions of industries, new sources of competition, changing product life cycles and the increased globalisation of markets.

Organisational forces
An understanding of the buying organisation is based on the strategic priorities of the firm,
the role that purchasing occupies in the organisation and the competitive challenges that the
firm confronts.

Strategic solutions
Organisational buying decisions are made to facilitate organisational activities and to support
the firm’s mission and strategies. A business marketer who understands the strategic priorities and concerns that occupy key decision makers is better equipped to deliver the desired
solution.
To provide such customer solutions, the business marketer requires an intimate understanding of the opportunities and threats that the customer is confronted with.

Strategic role of purchasing
In many firms, purchasing strategy is becoming more closely tied to corporate strategy
(Nellore and Söderquist, 2000). Compared to traditional buyers, recent research suggests that
more strategically orientated purchasing managers are:
●
●

●

more receptive to information and draw it from a wide variety of sources;
more sensitive to the importance of longer-term supplier relationships, questions of price
in relation to performance and broader environmental issues;
more focused on the competences of suppliers in evaluating alternative firms.

Moreover, these purchasing managers are evaluated on performance criteria that are more
tightly linked to strategic performance.

CHAPTER 4 Customer behaviour

143

Given rising competitive pressures, purchasing managers are increasingly using rigorous
cost modelling approaches to identify the factors that drive the cost of purchased goods and
services.
To secure competitive advantage, purchasing managers are also tying purchasing strategies more directly to corporate goals to increase product quality, accelerate product
development, capitalise on new technologies, or respond more quickly to changing customer
expectations. Indeed, leading purchasing organisations have learnt that these results can be
achieved only by building close relationships with suppliers and by using B2B Internetbased marketplaces.
As purchasing assumes a more strategic role in the firm, the business marketer must understand the competitive realities of the customer’s business and develop/produce better value
for customers – in the form of products, services and ideas that improve the performance
goals of the customer organisation.
An organisation that centralises buying decisions will approach purchasing differently
from a company where purchasing decisions are made at individual user locations. When
purchasing is centralised, a separate organisational unit is given authority for purchases at
a regional, divisional or headquarters level. There seems to be a trend towards centralised
purchasing. Why? First, through centralisation, purchasing strategy can be better integrated
with corporate strategy. Second, an organisation with multiple plant locations can often
achieve cost savings by pooling common requirements. Third, the nature of the supply environment can also determine whether purchasing is centralised. If the supply environment is
dominated by a few large sellers, centralised buying may be particularly useful in securing
favourable terms and proper service. If the supply industry consists of many small firms, each
covering limited geographical areas, decentralised purchasing may achieve better support.
Finally, the location of purchasing in the organisation often hinges on the location of
key buying influencers. If engineering plays an active role in the purchasing process, the
purchasing function must be close organisationally and physically.
The organisation of the marketer’s selling strategy should parallel the organisation of
the purchasing function of key accounts. To avoid disjointed selling activities and internal
conflict in the sales organisations, and to serve the special needs of important customers,
many business marketers have appointed key account managers to take care of coordinating
a key account’s centralised and dispersed requirements, often on a global level (Pardo, 1999;
Holt, 2000).

Group forces

New task buying
An organisational buying
situation in which a buyer
is seeking to fill a need
never before addressed.
Uncertainty and lack
of information about
products and suppliers
characterise this situation.

Multiple buying influencers and group forces are critical in organisational buying decisions.
The organisational buying process typically involves a complex set of smaller decisions made
or influenced by several individuals. The degree of involvement of group members in the
procurement process varies from routine rebuys, in which the purchasing agent simply takes
into account the preferences of others, to complex new task buying situations, in which a
group plays an active role throughout the decision process.
The business marketer addresses three questions:
1 Which organisational members take part in the buying process?
2 What is each member’s relative influence in the decision?
3 What criteria are important to each member in evaluating a prospective supplier?

The salesperson who can correctly answer these questions is ideally prepared to meet the
needs of a buying organisation and has a high probability of becoming the chosen supplier.

The buying centre
A group of people in the organisation who make a purchase decision are said to form the
buying centre, sometimes referred to as the decision-making unit (DMU).

144

Part II Assessing the external marketing situation

Gatekeeper
Those who control the
flow of information, e.g.
secretaries who may
allow or prevent access
to a DMU member, or a
buyer whose agreement
must be sought before
a supplier can contact
other members of the
DMU.

The concept of the buying centre provides rich insights into the role of group forces in
organisational buying behaviour. The buying centre consists of those individuals who participate in the purchasing decision and who share the goals and risks arising from the decision
(Bonoma, 2006).
Roles for members of the buying centre have been classified as: users, influencers, buyers,
deciders and gatekeepers (Webster and Wind, 1972). The importance of different organisational roles varies according to the phase of the buying process. The make-up of a buying
centre in terms of members and the roles fulfilled changes depending on organisational
factors, the organisation size and the buying situation (Farrell and Schroder, 1999; Ghingold
and Wilson, 1998).
Roles can be conceived fairly easily for purchasing products such as production materials.
It is more difficult to specify roles for services.
Determining who within the company is the user of transportation for inbound materials
or outbound products, who is the gatekeeper, or who has the decider role is a difficult task. It
is quite likely that several individuals occupy the same role within the buying centre.

Users
Users are those within the buying centre who will actually use the product being purchased.
In manufacturing firms, for example, they are the employees who operate or service
production equipment. When components are purchased, the users assemble the parts.
In hospitals and other healthcare facilities, users may be nurses, physicians or the technicians who operate medical equipment. Users with a high degree of expertise may help
develop product specifications. They are especially important in the last phase of the buying
process: follow-through. They can provide valuable feedback to sales representatives about
how well the product performs. Users can influence the buying decision in a positive way by
suggesting the need for purchased materials and by defining standards of product quality,
or in a negative way by refusing to work with the materials of certain suppliers for any of
several reasons.

Influencers
Influencers are members of the firm who directly or indirectly influence buying or usage
decisions. They exert their influence by defining criteria that constrain the choices that can
be considered in the purchase decision, or by providing information with which to evaluate
alternative buying actions. Technical personnel are significant influencers, especially in the
purchase of equipment or the development of new products or processes.

Buyers
Buyers have formal authority for selecting the supplier and managing the terms of the
purchase. Depending upon the nature of the organisation and its size, buyers may have such
titles as purchasing manager, purchasing agent or buyer, or this responsibility and authority
may reside with people other than those designated specifically as buyers â&#x20AC;&#x201C; the production
manager, for instance.

Deciders
Deciders are those members of the buying organisation who have either formal or informal
power to determine the final selection of suppliers. The buyer may be the decider, but it is also
possible that the buying decision is made by somebody else and that the buyer is expected to
ensure proper implementation of the decision.
In practice, it is not always easy to determine when the decision is actually made and who
makes it. An engineer may develop a specification that can only be met by one supplier. Thus,
although purchasing agents may be the only people with formal authority to sign a buying
contract, they may not be the actual deciders.

CHAPTER 4 Customer behaviour

145

Often the selling organisation solidifies its relationship with the buying centre over time,
which is called ‘creeping commitment’. The seller gradually wins enough support to obtain the
order. In competitive bidding situations, the decision to purchase occurs when the envelopes
are opened. In these cases, however, much depends on how the specifications are drawn up
in the first place. Some salespeople work closely with the buying organisation at that stage to
change the specifications and influence the decision in their favour.

Gatekeepers

Exhibition
An event that brings
buyers and sellers
together in a commercial
setting.

Gatekeepers control the flow of commercial (outside) information into the buying organisation. Purchasing agents have been referred to as gatekeepers because they are often the
first people that sales representatives contact. They are responsible for screening all potential
sellers and allowing only the most qualified to gain access to key decision makers.
The control of information may be accomplished by disseminating printed information,
such as advertisements, or by controlling which salesperson will speak to which individuals
in the buying centre. For example, the purchasing agent might perform this screening role by
opening the gate to the buying centre for some sales personnel and closing it to others.
As mentioned earlier, the buying process is seldom the same from one firm to the next, or
even from one purchase to the next within a given firm. In each case, the decision-making
process of the buying organisation is affected by a number of factors.
The background of the buying centre members affects the buying process. Purchasing
agents, engineers, users and others in the organisation have expectations that are formed
largely by their experience.
Organisational buying is influenced by sources of information, such as sales people,
exhibitions and trade shows, direct mail, press releases, journal advertising, professional and
technical conferences, trade news and word of mouth.
So far, much of our discussion has focused on the buying centre. A more formalised
buying centre, the buying committee, is used extensively in the resellers’ market and by many
business organisations, particularly when purchasing is centralised. In the resellers’ market,
organisations such as food chain retailers form buying committees that meet on a regular
basis to decide on new product purchases.

Individual forces
Individuals, not organisations, make buying decisions. Each member of the buying centre
has a unique personality, a particular set of experiences, a specified organisational function
and a perception of how best to achieve both personal and organisational goals. Importantly,
research confirms that organisational members who perceive that they have an important
personal stake and commitment in the buying decision will participate more forcefully in the
decision process than their colleagues. To understand the organisational buyer, the marketer
should be aware of individual perceptions of the buying situation.

4.6

Customer-perceived value and customer satisfaction
In this book, customer satisfaction and customer value are closely linked together, though
assessing customer-perceived value sometimes goes beyond tracking customer satisfaction.
Delivering superior value to customers is an ongoing concern of management in many business markets. Knowing where value resides from the standpoint of the customer has become
critical for suppliers because greater levels of customer satisfaction lead to greater levels of
customer loyalty and repeat buying. This again leads to a higher degree of commitment and,
ultimately, higher market share and higher profit (see Figure 4.15). In fact, delivering superior
value to customers is key to creating and sustaining long-term industrial relationships.

As seen in Figure 4.15, we will concentrate on the measurement of customer satisfaction
in this section. Later on we will discuss the implications of customer satisfaction on other key
measures.

Measuring customer satisfaction/customer value
Value is perceived subjectively by customers. Customers are not homogeneous; therefore,
different customer segments perceive different values for the same product. Different people
in the customer organisation are involved in the purchasing process. Whereas, in some cases,
firms may have established a formal buying centre, in other cases the people may be part of
an informal group. Also, the number of people involved in the purchasing process and their
positions may vary across customer organisations.
These members of a buyer’s organisation have different perceptions of a supplier’s value
delivery. Therefore, in a customer value audit it is necessary to identify and assess the value
perceptions of all key people involved in the purchasing process. Such a multiple-person
approach is considered to be more reliable by far than single-person studies.
In addition, within the supplier’s organisation, opinions of how customers view the company’s products differ among functional areas – i.e., general management, marketing and sales
management, salespeople or customer service personnel. With value perceptions differing
between customers and suppliers, and even within these organisations, identifying and
bridging perceptual gaps become critical steps in value delivery.

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147

Customer satisfaction, loyalty and bonding

Penetration
Entering a new market of
customers.

The first qualitative criterion is customer satisfaction. Satisfaction arises if the customer’s
experience fulfils or exceeds expectations. When satisfaction and customer penetration
are cross-referenced, as in Table 4.1, the upper-left corner is the most interesting – where
penetration is high, but satisfaction low. This situation may arise when satisfaction and
loyalty are changing at different rates.
With weak loyalty, customer recommendations or friendly customer feedback cannot be
expected. Well-founded loyalty (upper-right corner of Table 4.1), where there is high quantitative loyalty and satisfaction, should be the aim, if all the benefits of loyalty are to be enjoyed.
On the other hand, loyalty may be missing even though there is customer satisfaction – for
example, where there is some kind of barrier to a more intensive relationship. If this is the
case, then these barriers have to be broken down if RM is to be successful.
Customer bonding may be seen as a process that influences customers, and customer
loyalty as the result of this process. We can take three different perspectives in defining
customer bonding and loyalty. These perspectives are described in more detail below (see also
the summary in Table 4.2).
Suppliers will define customer bonding as a bundle of activities that builds up intensive
relationships with customers, including contact opportunities, barriers to a change of supplier
or creation of customer preferences for the supplier (which may be based on technology,
materials, staff, etc.).
Looking at the relationships between supplier and customer, customer loyalty can be defined
and measured in terms of the amount and the quality of transactions between both parties.
Transactions cover, for example, the number of contacts or shopping visits, or the degree of

customer penetration (the proportion of a customer’s total buying volume accounted for by
one supplier). The qualitative side of transactions refers to the atmosphere in which they take
place – i.e., the climate of the relationship during the contact between both sides.
Customers will declare themselves loyal to a supplier through feelings and perceptions of
(high) satisfaction, through positive attitudes and through certain preferences for the supplier,
meaning that customers will be willing to repurchase from this supplier (Illert and Emmerich,
2008; Mouzas et al., 2007).

Increasing customer skills through investments in customers
One effective way in which manufacturers might increase customer retention could be to
increase customers’ post-purchase skills through targeted investments in the customers
themselves. Such a strategy is based on an interpretation of the customer as a co-producer in
the value-creation process. If such a strategy is to succeed, a significant amount of product
value must initially be inaccessible to the customer (e.g. the customer should be unable to
use certain product features). At the same time, it must be possible to give the consumer
access to this additional value by increasing his or her skills. Such an increase in customer
skills should produce a higher level of customer satisfaction and also have positive effects on
other dimensions of the quality of the customer–company relationship. Hence, an investment in customers aims to improve their post-purchase skills – for example, by increasing
their ability to use the full range of product features or to maintain the product adequately
(Thurau and Hansen, 2000).

4.7

Customisation – tailoring the offer to the individual customer

Customisation
Making something
(product/service)
according to a customer’s
individual requirements.

Database marketing
An interactive approach
to marketing that uses
individually addressable
marketing media and
channels to provide
information to a target
audience, stimulate
demand and stay close to
customers.

Traditional marketing often views the customer as a passive participant in the exchange
process until the time of the sale. Customisation sees the customer as an active participant
at every stage of the product development, purchase and consumption process, and as the
co-producer of the product and service offering (Miceli, 2007).
Instead of accepting off-the-shelf products, customers are creating their own products,
from configuring computers to building their own CDs. New products no longer come fully
formed out of the laboratories, but arise through an interactive process of working directly
with the market. Each customised product is a result of a co-design and production process of
the customers and the firm. When this process is repeated across a number of customers, new
insights emerge about customer preferences. Attributes and offerings that are not attractive
can be dropped and those that are frequently requested can be enhanced.
By combining customer configuration with a mass production strategy, companies can also
use the insights from the customised products to shape their mass-produced line. Customer
design choices may catch emerging trends.
Early customisation efforts were in the form of ‘made to order’ products and services (e.g.
furniture or tailored suits), which, however, had long lead times and were not tied to flexible manufacturing systems. The recent advances in flexible manufacturing coupled with the
collection of detailed information about customers, and advances in database marketing and
its associated analyses, enable firms to offer products tailored to customers’ needs (customisation), but at costs that are almost the same as that of standardised production and mass
marketing. This shift is illustrated in Figure 4.16.
As shown in Figure 4.16, mass customisation changed the centuries-old trade-off between
tailoring a product to the needs of specific customers and the costs or time associated with
delivering the desired product. Continuing innovations in flexible manufacturing, inventory
management and integration of global supply chains have provided further impetus in favour
of delivering customised products quickly and at reasonable costs.

Individually and collectively, customers now have the means to directly influence a
company’s policies and strategies. For example, the growth of online product communities is
profoundly altering the power structure in the exchange process.
Database marketing offers alternative approaches by which firms can tailor individual offerings and products to increase customer loyalty, volume of purchases and repeat purchases. First,
companies that have made a commitment to one-to-one marketing are good at managing this
information and communications process. In this way, companies can actually offer customers
fewer options than mass marketers, because only the relevant options are visible. Second, firms
can use innovative software to offer creative recommendations to a purchaser of music, movies,
books, etc., based on related products purchased by other customers who purchase the same
product(s). Third, companies can ask customers to provide them with information about their
preferences, and then design products and services to conform to the stated preferences.
While traditional marketing environments (mass-produced products sold through mass
markets to target segments) will continue to play an important role in the economy, and while
an increasing number of companies experiment with mass customisation and personalisation, the new type of marketing characterised by customisation represents a growing and
increasingly important segment of the business. In the online environment, marketers are
able to better identify customer preferences and either focus their messages and products
and services on meeting the needs of each individual, or allow the customer to customise the
message and products and services they desire.

The challenges of customisation
Customisation also raises a number of challenges including issues related to obtaining information from customers, the identification of the intangible factors that can make or break an
offering, enhanced customer expectations, the need for limiting the complexity of options
and the required changes to the entire marketing and business strategy of the firm.
In the following, some of these challenging factors are discussed (Wind and Rangaswamy,
2001).

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Part II Assessing the external marketing situation

Knowledge exchange with customers

Decision support system
A computer system that
stores custom data and
transforms them into
accessible information. It
includes databases and
software.

A key challenge is that for customisation to work effectively there needs to be exchange of
information and knowledge between companies and customers. This requires the company
to ‘open up’ some of its internal processes and structures to its customers. It also requires
customers to be willing to share their attitudes, preferences and purchase patterns with the
company on an ongoing basis.
In general, as consumers become more empowered, one can also see the further development of search engines and decision support systems to help consumers make better decisions, including the customisation of the product and services they design and the associated
information they seek.

Higher customer expectations
The customisation process creates higher expectations on the part of customers. They expect
the product they receive to match their wants and needs perfectly. If it fails to meet these
higher expectations, they are likely to be far more disappointed and dissatisfied than if they
had bought a standard product.
Companies need to have the marketing and manufacturing capabilities to maintain a oneto-one relationship and to deliver what the customer wants efficiently.

Limiting the options offered to customers
The temptation in the customisation process is to give customers too many options, but this
may lead to psychological shutdown. The key is to offer just the right amount of variety so
customers are presented with the right choices without being overwhelmed.
The decision of how much customisation to offer depends not only on consumers’
preferences and ability to handle the choices, but also on the nature of the product and its
requirements to assure quality performance, capabilities of the available technology, the
competitive offerings and the implications of the target positioning and value proposition.
One way to limit the options to the feasible set is to present standardised option packages,
as is common in the car industry. This gives customers a starting point in developing more
customised products. The car industry uses these options very effectively, but does not do as
good a job at inviting customers to use these options packages. The manufacturers generally
offer many options, but customers typically buy the cars that are on display.

3-D printing – a possible new industrial revolution
in customisation
3-D printing
An additive manufacturing
process that turns a
computer-aided design
(CAD) file, created on
a computer or with
a 3-D scanner, into a
physical object. 3-D
printing enables firms to
build custom products
economically in small
quantities, which also
allows firms to serve
small market segments
profitably.

3-D printing, also known as additive manufacturing, turns a computer-aided design (CAD)
file, created on a computer or with a 3-D scanner, into a physical object, allowing users to make
almost anything. Unlike traditional manufacturing, which uses subtractive processes, such as
grinding, forging, drilling and cutting, 3-D printing is an additive process, whereby products
are built on a layer-by-layer basis, through a series of cross-sectional slices (Berman, 2012).
The largest commercial application for 3-D printing today is rapid prototyping, which
accounts for the majority of the 3-D printing market. Rapid prototyping shortens the development life cycle, enables easy experimentation and innovation and saves costs by allowing
for easy tweaks and changes to the design.
Increasingly, 3-D printers are being used for direct digital manufacturing, Until now, 3-D
printing has been applied to making prototypes, mock-ups, replacement parts, dental crowns
and artificial limbs (for the human body). The fashion industry is also adopting 3-D printing.
Designers are now 3-D printing jewellery and clothing. 3-D printing eventually will change
the way lifestyle products are made and sold. Tailors could customise clothing on a computer
and print the products in the local stores. With low-cost 3-D printing, anyone with a digital
design can bypass traditional supply chains and self-manufacture a product. Not surprisingly,

CHAPTER 4 Customer behaviour

151

3-D printing has created a new generation of at-home and do-it-yourself manufacturers.
Microsoft has adapted its popular Kinect device (for its Xbox games console) to make 3-D
scanning easy and inexpensive. This can be used, for example, for scanning the human body
in order to get the right sizes and style in clothing.
On the macro level, 3-D printing has the potential to disrupt or destroy traditional models
of manufacturing, distribution, warehousing, shipping and retailing because products will be
made where they are needed. Future sales will be of designs, not products, and because 3-D
printing allows a product to be printed where it is needed, warehouses may be replaced with
digital inventories. Lower entry barriers will allow more local and small businesses to prosper.
Instead of relying on traditional manufacturing chains, people will design and print their own
products or have a local service bureau print it for them. 3-D printing enables firms to build
custom products economically in small quantities, which also allows firms to serve small
market segments profitably.
By reducing the need to ship physical products and efficiently using raw materials, 3-D
printing saves energy. By combining 3-D printing with the energy-saving efforts that most
countries are undertaking, jobs can be repatriated or kept at home.
3-D printing will eliminate some manufacturing jobs, but it should create others. New jobs,
coupled with diminishing cost savings of offshoring and outsourcing, give 3-D printing the
potential to foster a manufacturing come-back in countries with strong intellectual capital but
high manufacturing and labour costs.
However, when 3-D printing of complex structures, such as electronic devices, becomes
commonplace in the home, 3-D printing may place stress on the utility patent system in the
same manner that the digital revolution, the Internet and file sharing have placed stress on
the music industry and the copyright system. Products that are copyrightable, such as dolls,
action figures and figurines and toys, are especially vulnerable to 3-D printing at home. Toys
can be scanned and 3-D printed at home, and the designs can be shared peer-to-peer, thereby
threatening copyright and design patent protection for such products. Trademark owners may
also be affected when branded products are copied at home (Hordnick and Roland, 2013).

4.8

Summary
Consumersâ&#x20AC;&#x2122; decision-making processes are classified largely on the basis of high and low
involvement with the product and the extensiveness of the search for information. Highinvolvement products or services are psychologically important to the consumer. To reduce the
psychological and financial risks associated with buying a high-involvement item, consumers
engage in a complex decision-making process. The five major steps in the process are problem
identification, information search, evaluation of alternatives, purchase and post-purchase evaluation. The way in which these steps are carried out differs between products and services.
Most purchase decisions have low consumer involvement. Therefore, consumers do not
engage in an extensive search for information or make a detailed evaluation of alternative
brands. Such search-and-evaluation behaviour is more likely to occur with products than
with services. Buying behaviour is strongly influenced by psychological and personal
characteristics that vary across individual consumers and countries. Information and social
pressures received from other people influence consumersâ&#x20AC;&#x2122; wants, needs, evaluations and
preferences for various products and brand names.
By definition, organisational customers can be grouped into three main categories:
1 goods and services producers (raw materials, components, software, office supplies);
2 intermediates (resellers);
3 public organisations/government.

Organisational buyers purchase goods and services for further production for use in operations,
or for resale to other customers. In contrast, individuals and households buy for their own use

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Part II Assessing the external marketing situation

and consumption. These two types of market also differ in numerous other ways, including their
demand characteristics, their market demographics and their buyer–supplier relationships.
The buying task is determined by three interrelated factors:
1 the newness of the problem to the decision makers;
2 the information needs of the people in the buying centre;
3 the number of new alternative products and/or suppliers to be considered.

Based on these factors, there are three buying situations: straight rebuy, modified rebuy and
new-task buying. Organisational purchasing often involves people from various departments.
The individuals involved in the buying process form what is called a buying centre and share
information relevant to the purchase of a particular product or service. One of the marketer’s
most important tasks is to identify which individuals in the buying centre are responsible for
a particular product, determine the relative influence of each, identify the decision criteria of
each and understand how each group member perceives the firm and its products.
These participants in the buying process can be grouped as users, influencers, gatekeepers,
deciders and buyers, and they buy in larger quantities – and purchase more complex and
expensive goods and services – than do consumers. Differences between the business and
consumer markets are summarised in Table 4.3.
The Internet is playing an increasing role in both B2B and B2C markets. Websites enable
organisations to promote brand values, reduce printing costs, attract and qualify prospects
and leads and foster customer loyalty. Sites can also expand the customer database, provide
customer service and showcase and sell products.
The interactive age is providing businesses with the potential to strengthen RM and
generate new customers. Consumers benefit from the Internet through better possibilities of
providing relevant information (quality, prices, etc.) when comparing and evaluating product
or brand alternatives in the buying process.
Traditional marketing often views the customer as a passive participant. However, customisation sees the customer as a more active partner in the product development and consumption
process. An extreme version of customisation is the 3-D printing concept. By manufacturing
locally on 3-D printers, 3-D printing enables firms to build totally customised products economically in small quantities, which also allows firms to serve small market segments profitably.
Table 4.3 Differences between the business and consumer markets
B2B market

Spotify (the brand name is a combination of ‘spot’ and ‘identify’) is a digital music-streaming service that was launched
in Sweden in 2008. Spotify was founded by Swedes Daniel
Ek and Martin Lorentzon (see picture below).
The company provides on-demand access to millions of
songs, which can be accessed on a range of devices. As of
January 2014, Spotify operates in 57 countries worldwide
and has more than 30 million active users. While most of
these users opt for the free version of the service, six million
pay for the premium service. Free-use Spotify, initially
available only on a desktop or laptop but now expanded
to include tablets and smartphones, generates revenues
through advertisements that interrupt the user’s listening.
Premium users can listen without advertisements or limits
on all supported devices, including smartphones, tablets
and TVs. Around 70 per cent of Spotify’s total revenue
(including that from advertising and subscription fees) goes
to rights holders, including artists, labels and publishers.
Spotify has generated more than $500m for rights holders
since the company’s inception in 2008. It expects to replicate this figure in 2013 alone, highlighting the strong growth
the company has experienced in recent years. Despite Spotify’s success, the service faces competition from a host of
other streaming services. For example, Pandora and Rhapsody operate in the USA, while Bugs, Mnet and Soribada
are major sites in South Korea – a country that, like Sweden,
generates a great deal of its digital revenues from streaming.

Spotify (www.spotify.com) principally operates under
the so-called ‘Freemium’ model: basic services are free,
and more advanced, or additional features are offered
at a premium. This is augmented by income from music
purchases within the player. As of 2013, Spotify offered a
US$10 per month unlimited subscription package on all
platforms (desktop, tablet and smartphone).
Spotify’s existing shareholders include a host of prominent names from Wall Street and Silicon Valley, including
Goldman Sachs, DST, Accel Partners and Kleiner Perkins.
The Coca-Cola Company became a minor shareholder
in Spotify in 2013, underlining the growing trend for major
consumer brands to acquire shareholdings in digital ventures.
Today, Spotify Ltd. operates as the parent company in
London; Spotify AB handles research and development in
Stockholm.

Streaming of music
Streaming is a method of delivering media to an end-user. As
opposed to downloading, whereby an end-user downloads
a file, streamed music is readily available in ‘real time’ to the
listener and is transferred as a continuous stream of data. Unlike
in the case of downloading, it is difficult for users of streaming
services to save the content and thus potentially distribute it
illegally. Streaming requires a broadband or Internet connection capable of transferring the data fast enough. In order to
minimise the bandwidth used, files encoded for streaming are
often highly compressed. Audio and video players, such as
Quick Time and Adobe Flash Player, tend to retrieve extra data
faster than they play it. In order to reduce the problem of the
audio or video stopping due to Internet problems, extra data
is stored as a ‘buffer’. However, when the data runs out, the
stream will stop and display a ‘buffering’ message.
The IFPI, representing the global recording industry,
reported that streaming accounts for a small part of the
$16.5bn music industry. Streaming services accounted for
just 20 per cent of the digital revenues in 2012; however, this
is up from 13 per cent in 2011. Digital revenues in general
grew from $5.4bn in 2011 to $5.8bn in 2012 – a slower rate
than streaming. However, subscription and ad-supported
streaming, such as YouTube and Spotify, saw royalties and
licence fees grow from $700 in 2011 to $1.2bn in 2012,
representing a growth rate of over 70 per cent. Growth has

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Part II Assessing the external marketing situation

been particularly strong in certain emerging markets that
have previously struggled to sell music and fight privacy. In
2012, the value of the music industry grew by 8 per cent,
9 per cent and 22 per cent in Mexico, Brazil and India,
respectively.
Ninety per cent of all Internet users are aware of the
services YouTube provides, followed by 70 per cent for
Apple and 68 per cent for Amazon. However, this awareness
varies from country to country. For example, the average
awareness of Apple was 70 per cent; however, this jumps to
84 per cent awareness when looking at the USA. In Europe,
the average awareness of Spotify was 56 per cent. In
Sweden, however, 96 per cent of Internet users were aware
of Spotify’s services. In France, awareness of Deezer (an
on-demand music website) was 75 per cent, compared to
an average of 31 per cent elsewhere. Despite these country
differences, it is clear that the majority of Internet users are
aware of the various digital options they have open to them.
Global technology giant Apple Inc. launched its iTunes
music store in April 2003. Since the launch of iTunes, how
consumers buy music, and how much they buy, has changed
dramatically. As can be seen in the figures above, unit sales of
music have gone up drastically coinciding with the launch of
iTunes. The popular format of music has changed dramatically as well. Sales of CDs have dropped and single downloads
have soared. However, despite this dramatic increase in unit
sales, the US music industry’s value has dropped dramatically
from $11.8bn in 2003 to $7.1bn in 2012. The reason for this
is the resurgence in popularity of singles, which are much
cheaper than albums. In 2000, 943 million CD albums were
sold in the USA. Just seven years later, 500 million CD albums
were sold, compared to 891 million digital singles. In 2012,
digital singles outsold CD sales by a factor of seven. The
Recording Industry Association of America (RIAA) reported
that of all music-related transactions in 2012, three quarters
were digital singles. And though Apple is not, by any means,
the only company selling music digitally, it is certainly the
biggest – responsible for the majority of digital music sales
– meaning what’s popular on iTunes has a dramatic impact
on the overall industry. However, a report by the IFPI indicates that this singles vs. albums is a trend that may be in
reverse. In 2012, download single sales increased by 8 per
cent worldwide, to 2.3 billion units. Digital albums, on the
other hand, were up 17 per cent, to 207 million units.
Streaming services are growing at a quick rate yearon-year, and now contribute more to the music industry’s
yearly revenues than ever before. However, there remains
a marked difference in the popularity of streaming services
country to country. In Sweden, for example, where Spotify
was founded, 91 per cent of the country’s digital income
is made from streaming services. In comparison, 13 per
cent of the worldwide digital income is from streaming
services. Sweden experienced very strong growth in the
music industry (13.8 per cent) in 2012, reaching a level not

reached since 2005, compared to the 0.3 per cent growth
experienced globally. Streaming services were touted as the
main force driving this growth. The company is so successful
in Sweden that over a third of the country’s population is
registered with Spotify. Between 2008 and 2012, Sweden’s
per capita spending on music increased by 15 per cent.
The success of legal streaming services in Sweden represents a successful turnaround in a country that had previously experienced big problems with illegal piracy. The
Pirate Bay, a notorious Swedish file-sharing site that was
founded in 2003, was shut down for a few days in 2006
as the USA threatened sanctions against Sweden. In 2009,
three co-founders of the company were found guilty of
‘assisting in making copyright content available’, offered
to pay more than $3m in damages and were sentenced
to a year in prison each. Despite this, the website is still
successful globally, with around 25 million active users.

The global digital music market
The total digital music market consists mainly of two parts:
downloading of music (to an own device) and streaming of
music (from the Internet ‘cloud’).
First we will describe the total digital music market and
then go in to detail about the ‘streaming music’ market,
which is the target market for Spotify.
In 2013, global recorded music sales totalled $16.5 bn.
The global digital music market has expanded continuously
since 2008. The market share of digital music has risen by
22 per cent (US$4.2 bn) in 2008 to 57 per cent (US$ 5.8bn)
in 2012. In the same period, the physical music market lost
nearly a third of its volume (IFPI, 2013: 7). The drivers of the
digital music market are not music downloads any more,
but revenues from streaming services, which grew by 62 per
cent (on US$ basis) from 2011 to 2012 according to the
current IFPI report (2013: 24). Music streaming revenue thus
accounted for 13 per cent of the global digital music market.
An international comparison of different music markets
based on IFPI data (IFPI, 2013) underpins the assumption of
various degrees of digital transformation in different countries. This transformation has taken place in markets with
a digital market share of more than 50 per cent. China is
the front runner, with a digital share of 82 per cent but with
a still higher piracy rate. India follows with 60 per cent, in
front of Sweden (59 per cent), the USA (58 per cent), Norway
(57 per cent), Thailand (57 per cent), Ecuador (54 per cent)
and Paraguay (54 per cent).
On the way to a digitised music market are countries with
a digital share beyond the international average of 35 per
cent but lower than 50 per cent, such as Australia (47 per
cent), Denmark (46 per cent), Canada (43 per cent), South
Korea (43 per cent), Ireland (40 per cent), Malaysia (40 per
cent), the UK (39 per cent), New Zealand (36 per cent) and
Mexico (35 per cent).

part Ii CASE STUDY

The next group of countries has a digital share slightly
below average: Singapore (33 per cent), Switzerland (32 per
cent), the Philippines (31 per cent) and Colombia (30 per cent).
The group of countries with an ‘average’ digital share
in the overall recorded music market (between 20 and
29 per cent) is: Taiwan (28 per cent), Brazil (27 per cent),
Italy (27 per cent), The Netherlands (27 per cent), Spain
(27 per cent), Hong Kong (27 per cent), France (23 per cent),
Chile (23 per cent), Finland (22 per cent), Portugal (22 per
cent) and Austria (21 per cent).
A digital music share that is well below average can be
found in countries with digital markets that account for 10
to 20 per cent of the recorded music sales: Germany (19 per
cent), Peru (19 per cent), Belgium (18 per cent), Japan (17 per
cent), Bulgaria (16 per cent), Czech Republic (14 per cent),
Turkey (12 per cent), Indonesia (12 per cent), Argentina (12 per
cent), Slovakia (11 per cent) and Hungary (10 per cent).
Finally we can identify a group of countries with an
under-developed digital music market with a share of less
than 10 per cent: Poland (9 per cent), South Africa (8 per
cent), Venezuela (6 per cent), Uruguay (5 per cent) and
Croatia (4 per cent).
In comparing the different countries, neither market
volume nor the geographical location of a market seem
to determine the degree of digitisation. Whereas the US
market, the largest recorded music market in the world,
has a considerably high digital market share, the second
largest market (in Japan) lags behind with a digital share of
17 per cent. Since the physical product still dominates the
Japanese recorded music market, Japan overtook the USA
as the largest market for CDs and other physical formats. In
Europe, the large French and UK recorded music markets
are at least on the way to digitisation, whereas the German
market lags behind. A clear trend to digitisation can be
observed only for the Scandinavian countries – Sweden,
Norway, and Denmark, with Finland lagging behind. Eastern
European music markets, on the other hand, have less digitised music markets.
In Asia we find a mixed picture. Some countries – China,
India and Thailand – have fully digitised music markets,
whereas other countries, such as Japan, Taiwan and
Indonesia, are still at the beginning of the digitisation process.
In Latin America relatively small markets, such as in Ecuador
and Paraguay, are highly digitised, whereas Brazil, Chile,
Venezuela and Uruguay have very low digital market shares.
The digital music industry has now gone global, and this
is helping propel the overall music industry into growth.
In 2011, the largest companies providing digital services,
including iTunes and Spotify, operated in just over 23 countries. At the beginning of 2013, this had jumped to more
than 100 countries. Additionally, there are markets where
digital sales now outstrip physical formats: the USA, Sweden,
India and Norway, to name a few. Worldwide, there are over
500 licensed digital music services in operation.

155

The Recording Industry Association of America calculates that revenues from services including Spotify, Pandora
and YouTube went from 3 per cent of industry revenues in
2007 to 15 per cent (or more than $1bn) in 2012.
Apple’s strategy has pleased some music companies
because its streaming service also encourages downloads.
But many content owners still believe that streaming cannibalises download and DVD revenues.

The music-streaming markets in an
international comparison
We can identify nine different groups of countries within the
music-streaming market. Sweden is a category by itself, with a
subscription revenue share of 91 per cent in the digital music
market in 2012. Sweden is, therefore, the second-largest musicstreaming market worldwide – behind the USA – with a sales
volume of US$94.55. Norway and Finland are the other two
Scandinavian countries in global top streaming markets, with
a streaming share of 74 per cent and 70 per cent respectively.
With a sales volume of US$50.10, Norway has an ‘over-dimensioned’ streaming market compared to its small number of
inhabitants of five million. Therefore, Norway is the sixth-largest
music streaming market worldwide. Norway is close behind
South Korea, which had the exactly same streaming share of
74 per cent as Norway. Taiwan and Hong Kong complete the
list of countries with a streaming share well beyond 70 per cent.
The second category consists of countries with a
streaming market share of more than 50 per cent but lower
than 70 per cent. Among them we can find several Eastern
European countries – Poland (63 per cent), Bulgaria (60 per
cent), Slovakia(53 per cent), Czech Republic (54 per cent)
and Hungary (50 per cent). However, two Western European
countries are also included in this category: Spain, with a
streaming share of 52 per cent, and The Netherlands with
54 per cent. Turkey (68 per cent), Brazil (53 per cent), China
(52 per cent) and India (49 per cent) also have a relatively
high music-streaming share.
It is striking that only a few countries have an average
streaming share of about 50 per cent or slightly less:
Denmark (47 per cent), Portugal (45 per cent), France
(40 per cent) and Argentina (34 per cent). It seems that
the global music-streaming market is divided principally
into countries with a high – more than 50 per cent –
streaming share and those with a share below 30 per
cent, such as Italy (29 per cent), Singapore (27 per cent),
Thailand (25 per cent), Mexico (19 per cent) and Belgium
(18 per cent). Thailand is a good example of a market with
a high digital market but low streaming share; Canada,
Australia, Malaysia and the USA are in the same situation. The USA has the largest streaming market worldwide, but it accounts for just 8 per cent of its digital music
market, according to IFPI numbers. Likewise in the UK, the
revenue from subscription-based models accounts for just

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Part II Assessing the external marketing situation

12 per cent of the overall digital music sales, despite a high
number of music-streaming services.
The digital transformation of music markets is far more
complex than a simple format shift such as that from vinyl
records to CD in the 1980s. The digital music markets are very
dynamic. In The Netherlands, for example, subscription models
did not play an essential role in 2010, whereas ad-supported
freemium offerings accounted for 17 per cent of the digital
sales – apart from single-track downloads with a share of
49 per cent and album downloads with 25 per cent. A year
later, however, the ad-supported revenue exploded to a 35 per
cent share and the subscription revenue became visible for
the first time, with a 5 per cent share. In 2012 the subscription
revenue rocketed to a 28 per cent share and equals the singletrack download sales. Digital album sales lag behind, with a
modest share of 12 per cent in the overall digital music market.
A similar dynamic can be observed for other countries.
This indicates that the user behaviour has not stabilised yet
and the change from an ownership to an access model is an
erratic one. Thus, in Switzerland we can observe a regressive tendency (IFPI, 2013: 59). Whereas in 2009 and 2010
subscription services contributed 12 per cent to the digital
music sales, in 2012 they disappeared from the market. In
contrast, single-track downloads increased to an all-time
high of 51 per cent – if we consider the IFPI data correct.
And there is no automatism that follows that music
consumers have to be motivated by freemium models in
order to pay for subscription services at a later date. In Spain
(IFPI, 2013: 57) the subscription share was 27 per cent in
2010, and even 36 per cent a year later. In 2012, however,
the subscription revenue share fell to 24 per cent in favour
of ad-supported services, which accounted for a 39 per cent
share in the digital music market. The reason might be that
new offerings cannibalise or grow faster than existing ones.
Thus, there is no clear trend in the digitisation of the
phonographic markets. Some markets are dominated by
the download business, such as in Germany, the UK and
the USA, whereas in other markets the penetration rate of
streaming modes is remarkably high, such as in Sweden,
Norway and South Korea. In other countries, such as in
the Czech Republic, Spain and China, the revenue from
ad-supported services is predominant. Thus, it is not easy
to predict the future of the digital music market, especially
when it comes to music streaming.

Competition
Globally, Spotify faces competition from interactive on-demand music content, such as Apple’s iTunes,
Rhapsody and Amazon.
Besides competing for the listeners’ (end-users’) time,
money and attention, Spotify also competes with other
online content providers for companies’ overall marketing
budgets. The market for online advertising is intensely
competitive, and with the introduction of new technologies

and market entrants, this competition is expected to intensify in the future.
Large Internet companies such as Facebook, Google and
MSN have a Web traffic that provides a significant competitive advantage, and this also has a significant impact on
pricing for Internet advertising.
Downloading remains a popular way of accessing
music digitally. Many existing services announce international expansion plans and the roll-out of cloud-based
features. In 2013 Amazon, Apple, Google and Microsoft all
enhanced their music services with cloud-based features.
These provide customers with access to their entire music
collections – integrating downloaded and ‘sideloaded’
tracks into one collection – wherever they are, and on
whatever device. Consumer research suggests this is a key
feature for music fans. A UK study shows that 66 per cent
of those who own multiple devices say it is ‘very important’
to access content across all of them, while three in five
(59 per cent) said they access content more frequently
if it is seamlessly available (Wiggin, 2012 ‘Digital Entertainment Survey’, Entertainment Media Research, UK
(http://www.scribd.com/doc/92291568. Wiggin-2012-DigitalEntertainment-Survey).
Apple has simplified the design of its iTunes store and
introduced integration with iCloud, which is used by
190 million people (Apple). iCloud Play enables users to
stream their iTunes purchases to any Apple device, automatically adding new purchases into their libraries, while
iTunes Match can host songs not purchased from the iTunes
store in the iCloud for US$24.99 per year.
Following its launch in the USA, Amazon rolled out its
Cloud Player scan and match service in France, Germany,
Italy, Spain and the UK. Music libraries are scanned and
matched to the 20 million tracks in Amazon’s catalogue
and can be played on any device. Similar to iTunes Match,
Amazon’s Cloud Player provides remote access to collections for US$24.99 per year.
In October 2012, Google launched a scan and match
service in France, Germany, Italy, Spain, the UK and the USA.
Xbox Music from Microsoft also launched in October 2013,
offering a seamless music service on any device, including
the Xbox 360 games console. The service offers the choice
of a subscription service ‘Xbox Music Pass’ for US$9.99 per
month, or free on any Windows 8 device, as well as the
option to download tracks on demand.
Despite Apple’s current success in the music industry,
they are now attempting to keep up with the recent boom
in streaming services. Apple is reportedly in negotiations
with labels to add a streaming service to iTunes. In March
2013 it was reported that Apple’s initial offer to the labels
was 6 cents per song streamed. In comparison, Pandora,
Apple’s primary competitor, pays 12 cents per 100 songs.
The rate set by the Copyright Royalty Board, which applies
to companies that do not own broadcasting operations, is
around 21 cents per 100 songs. In May 2013, Apple released

part Ii CASE STUDY

a list of their top 25 free and paid-for apps of all time.
Pandora was the second most-downloaded free app. This
highlights the sheer popularity of streaming services and the
level of competition Apple faces.
Additionally, it was reported that Google are planning to
launch a YouTube subscription service. Because of the size
and strong branding of the two companies, they may experience success in their streaming ventures. Additionally, the two
companies have their own devices, which could be a huge
advantage as their streaming services could be promoted as
pre-loaded apps on Apple and Android devices.
Digital radio services, such as Pandora, are experiencing
increased popularity. The services create a customised playlist based on a listener’s reference point. This can include
an artist, genre or decade. ‘Half of music consumers prefer
a lean-back radio-style experience’, says Stephen Bryan of

157

WMG. In the USA, digital radio service, Pandora accounts
for 8 per cent of all radio listening, with 66 million active
listeners (up 5.6 per cent in 2012). The company also experienced global expansion when it opened in Australia and New
Zealand in 2012. Chief executive and president of Pandora,
Joe Kennedy, said, ‘We are penetrating areas where people
traditionally listen to radio, with 60 brands of car supporting
Pandora radio, but we are also now accessing the living room
with 650 home consumer products now supporting Pandora’.
One of Pandora’s competitors is Slacker, an Internet radio
service operating in the USA and Canada.
Deezer, too, is growing as a global brand, and is now available in 182 countries, supported by ISP partnerships in 20 territories. It has three million paying subscribers worldwide.
Table 1 shows the comparison of Spotify and its closest
‘streaming music’ competitor, Pandora.

Sources: Based on many different public sources, among them www.spotify.com and www.pandora.com

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Part II Assessing the external marketing situation

Critical views on Spotify’s pay to artists
Spotify has been accused of failing to compensate artists
fairly. Given that it takes about 50 streams to generate
the 99 cents of revenue a single-track download typically
sells for on iTunes, some media executives and artists feel
the income is not meaningful enough. As streaming services gain scale, however, this fear should be lower in the
future.
In December 2013, the company launched a new
website entitled ‘Spotify for Artists’ that revealed its business model and revenue data. The website stated that
Spotify paid its artists a per-stream of between US$0.006
and $0.0084. The streaming service part of the website
includes a section entitled ‘Spotify’s impact on piracy’, as a
response to the criticisms against the company regarding
the exploitation of musicians. Spotify states that it has
proven the theory that ‘given a free and legal alternative, people will pirate less’, and uses Sweden, Norway,
Denmark, the USA, The Netherlands and the UK to
provide evidence. For example, in Norway, the figure of
1.2 billion pirated songs in 2008 is compared to a figure of
210 million from 2012 (Spotify, 2013).
David Byrne, former member of the band Talking Heads,
published his opinion on streaming services such as Spotify
in The Guardian newspaper on 11 October 2013. Byrne
stated that, ‘if artists have to rely almost exclusively on the
income from these services, they will be out of work within
a year’.
Spotify has promised the artists that it will pay them five
times the current amount once it hits 40 million paying
subscribers, but with the current 7 million now, that might
not be anytime soon.
One of the reasons why the artists feel that they are not
paid well enough is that Spotify pays the licensing/royalty
fee to the record labels, and then the record labels keep an
‘administrative’ fee before the remaining amount is paid to
the artists.

Does Spotify have a sustainable business
model?
Whether or not music-streaming subscription services are
financially sustainable is open to debate. Without doubt,
music streaming is on the rise, and subscription service
companies such as Spotify and Pandora are all facing increases
in subscription numbers. The operating costs – particularly

the licensing/royalty fees – are what hinder the ‘bottom line’
success of the Spotify business model.
In the following, a typical month for Spotify is shown.
We assume that Spotify streams 500 million songs per day
for 30 days. Each stream pays $0.006 per song to the artist
(the low end compared to what is informed on the Spotify
website):
Spotify’s operating profit and loss statement per month
$Income per month 7 million paying subscribers 3 $10
5 70 million
Expenses per month 500 million streams 3 30 days 3
$0.006 5 90 million
Profit (loss) (20 million)
The gap per month may of course easily be covered by
the advertising income that Spotify would normally have
during a month.
Despite this add-generating revenue, Spotify is seeing ‘red’
year after year: $60 million in 2011 and $77 million in 2012.
These extensive licensing fees threaten the sustainability
of the subscription music-streaming model. The big question is: can Spotify add paying subscribers fast enough?
Though licensing fees (royalties to artists) account for
70 per cent of the revenues, there are also other costs to
consider: hosting costs and administrative and overhead
costs. Highest of all are marketing costs, especially in the
international expansion phase.

Questions
You are hired as a marketing expert by the Spotify CEO
in order to create more income, with a starting point in
Spotify’s ‘DNA’ profile.
1 What are the main elements of Spotify’s competitive advantage? Do you think that Spotify has real core
competences, which are more powerful than competitors’ competences?
2 Describe the main stages in the consumers’ buying
process, ending up with a paying subscriber of Spotify’s
music streaming.
3 What are the main influences on the B2B decision process
in order to increase the advertising generated revenue?
Sources www.Spotify.com; David Byrne (2013) ‘The internet will suck all
creative content out of the world’, The Guardian, 11 October 2013, p. 7;
Spotify (2013) ‘How is Spotify contributing to the music business?’, accessed
from: http://www.spotifyartists.com/spotify-explained/; ‘Spotify for Artists’,
Spotify Ltd. December 2013, retrieved 4 December 2013; other public data
available.

CHAPTER 4 Customer behaviour

159

Questions for discussion
1 What specific factors at the time of purchase may affect the buying decision in the B2C

market?

2 What is the difference between Generations X and Y?
3 How does the demand for industrial products differ from the demand for consumer

products?

4 What are the major differences between consumer and industrial buying behaviour?
5 How does the buying situation by class of purchase affect the organisational buying

process?

6 What are the differences between the traditional ‘buy grid’ model and the ‘extended buy

grid’ model?

7 Describe government buying procedures. Why is market orientation less important when

selling to governments?

8 What is the buying centre in a company? Describe its functions and the implications for

Contents
5.1 Introduction
5.2 Who are our competitors?
5.3 How are the competitors interacting?
Exhibit 5.1 McDonald’s and Burger King in an asymmetric interaction
5.4 How do we learn about our competitors?
5.5 What are the strengths and weaknesses of our competitors?
5.6 Market commonality and resource commonality
5.7 What are the objectives and strategies of our competitors?
5.8 What are the response patterns of our competitors?
Exhibit 5.2 Role play in CI as a predictor of competitive behaviour
5.9 Six steps to competitor analysis
5.10 How can we set up an organisation for competitor analysis and CI?
Exhibit 5.3 Counterintelligence done by Johnson Controls against Honeywell
5.11 Summary
Case study 5.1 Cereal Partners Worldwide (CPW): the no. 2 world player is
challenging the no. 1 – Kellogg
Questions for discussion
References

describe how to design a competitor intelligence (CI) system
evaluate the information sources for CI
specify the contents of a competitor audit
evaluate the strengths and weaknesses of competitors
assess current strategies of main competitors
give examples of how to evaluate the strengths and weaknesses of competitors
outline possible response patterns of main competitors.

Introduction

Competitive intelligence
Gathering, analysing and
distributing information
about products, customers,
competitors and any
aspect of the environment
needed to support
executives and managers
in making strategic
marketing decisions for an
organisation.
Competitor intelligence
(CI)
The process of identifying
key competitors; assessing
their objectives, strategies,
strengths and weaknesses
and reaction patterns;
and selecting which
competitors to attack
or avoid. This analysis
provides both an offensive
and defensive strategic
context through which to
identify opportunities and
threats.

Most often, competitive intelligence is used to mean the action of gathering, analysing and
distributing information about products, customers, competitors and any aspect of the environment needed to support executives and managers in making strategic marketing decisions
for an organisation. Competitor intelligence (CI) is a more narrow term, as it focuses only on
the competitor aspect.
Except for a minor section dealing with interaction between competitors (section 5.3),
this chapter mainly is about how to analyse competitors, their behaviour and their strategies. A more comprehensive analysis of competitor relationships is given in Chapter 6
(section 6.6).
Competitor intelligence is the publicly available information and other types of
information on competitors, current and potential, that is an important input in formulating
a marketing strategy. Managers at all levels in organisations should conduct competitive
intelligence scanning to monitor market variables that are continuously shifting. To sustain
competitive position, managers must prepare to respond quickly to changes in customer
preferences, competitor strategies and technological advancements (Dishman and Calof,
2008; Qiu, 2008).
However, no general would order an army to march without first fully knowing the enemy’s
position and intentions. Similarly, before deciding which competitive moves to make, a firm
must be aware of the perspectives of its competitors. CI includes information beyond industry
statistics and trade gossip. It involves the close observation of competitors to learn what they
do best and why and where they are weak.
In most Western countries the development has resulted in a major intensification of
competitor intelligence. The reasons for increasing CI are:
●
●
●
●
●
●

data protection;
different legislation from country to country;
fear that competitive intelligence is unethical;
fear of counter-intelligence;
failure of competitive strategies to yield the expected gain.

CHAPTER 5 Competitor analysis and intelligence

Stages of competitive development

Characteristics of the three stages of competitive development
Data
collection

The use of CI is increasing gradually. There is growing awareness of the need to have a
competitor strategy, which is every bit as important as the customer strategies that are already
commonplace (West, 1999).
In terms of their use of CI, companies seem to go through a series of stages (see Figure 5.1).
At the first stage is competitor awareness. This stage is entered soon after a company is formed,
or even before, when the start-up is being planned. Being competitor aware means that the key
competitors are known and that there is some knowledge – usually incomplete and certainly
unverified – about their products, their prices, the clients they have succeeded in winning
business from, the market sectors they service and the staff they employ.
The organisation that is competitor aware rarely uses the data that it holds other than for
occasional ad hoc tactical exercises, such as competitive pricing decisions, or as an input to a
business plan that has to be submitted to an external organisation, such as a bank.
As companies grow they tend to become competitor-sensitive, both in terms of their
awareness of the damage competitors can inflict on their business and the need to win orders
by competing more effectively. Unfortunately, being competitor-sensitive does not always
increase the demand for information on competitors. An alarming proportion of competitorsensitive companies continue to rely exclusively on informal information flows from their
salesforces, business contacts and the trade press, rather than from a structured intelligence
programme. When they do use sources other than the informal information channels the
prime motive is usually emulation. They seek to copy what they perceive to be the best of
their competitors’ practices. There is nothing wrong with emulation as a business process,
providing it is factually driven using such techniques as reverse engineering and competitor benchmarking, but it represents a very limited source of data that can be derived about
competitors’ activities.
The organisation that is competitor-intelligent is one that devotes serious resources to
studying its competitors and anticipating their actions. This includes identifying competitors’ physical and intangible resources; studying their organisations and their methods in as
much detail as possible; and developing knowledge of their strategies and potential plans. The
competitor-intelligent organisation is continuously aware of the threats posed by competitors,
the nature and seriousness of those threats and what needs to be done to counteract them.
They recognise the need to look forward to anticipate competitive actions and to predict the
likely responses to actions they are proposing to take themselves. They are also aware that the
most serious threats may arise from companies that are not yet active in their business sector.

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Part II Assessing the external marketing situation

Customer
Customer value A
(compared to price)

Customer value B
(compared to price)

Firm A

Firm B
Relative cost

Figure 5.2 The competitive triangle

There is a close parallel between the growth in competitor analysis and the development of
customer analysis. There was a time when organisations were only customer aware. Interest
in competitive strategy was nurtured by the publication of books such as Michael Porter’s
Competitive Advantage and Competitive Strategy in the 1980s. This was accompanied by a
short flirtation with marketing warfare that focused on beating the competition by adopting
military tactics.
Competition is good for customers as it means that companies have to try harder or lose
their customer base. In many markets, competition is the driving force of change. Without
competition, companies only satisfy: they provide satisfactory levels of customer value (satisfaction) but fail to excel. The conflict between improving customer value and costs is illustrated by the competitive triangle Figure 5.2.
This framework recognises that, for example, for firm A to be a winner in the competition
it is no longer sufficient to be good at satisfying customers’ needs (producing customer value),
companies also have to produce at a lower cost than other competitors (here competitor B).
This is called lower relative costs.
When developing a marketing strategy (Chapter 7), companies need to be aware of their
own strengths (S) and weaknesses (W), customer needs (O, opportunities) and the competitors (T, threats). Altogether these four elements represent the SWOT analysis, which in
Chapter 7 will be used as a basis for developing the firm’s marketing strategy. The focus of this
chapter, however, will be on analysing competitors at the strategic and tactical level.
Strategic intelligence looks to the future and allows an organisation to make informed
decisions concerning future conditions in the marketplace and/or industry. Tactical intelligence looks at the present. This level of intelligence provides decision makers with the
information necessary to monitor changes in the company’s current environment and
helps them search for new opportunities. To maximise the potential benefit of CI, the strategic and tactical levels must be coordinated. Because all the partner companies identified
coordination as a high priority, these businesses create, continuously improve and use CI
systems, processes and products that enable this to happen. Moreover, all of these companies believe that coordinating strategic and tactical intelligence with sales and marketing
has led to a strengthening in competitive positions as well as increases in customer satisfaction and retention.
Competitive analysis flows out of customer analysis. To truly know how you compare
with your competitors, you first need to understand your customers’ wants and needs. Then
you must identify both current and potential competitors in both your served and unserved
markets. Industry analysis is also important. You need to know about the suppliers to your
industry, as well as the channels that serve as intermediaries between you and your competitors and the end-users. These players have an impact on your competitive position. Once you
have identified your competitors, it may be possible to group them by factors, such as degree
of specialisation or degree of globalisation, to make it easier to discern patterns of competitive
behaviour. Now you should be in a position to do an in-depth analysis of competitors’ strategies. You must be careful not to focus simply on what your competitors are doing now. You
must consider where your competitors are going.

CHAPTER 5 Competitor analysis and intelligence

165

This chapter focuses on eight issues:
1
2
3
4
5
6
7
8
9

5.2

Who are our competitors? (section 5.2)
How are the competitors interacting? (section 5.3)
How do we learn about our competitors? (section 5.4)
What are the strengths and weaknesses of our competitors (competitor audit)? (section 5.5)
Market commonality and resource commonality (section 5.6)
What are the objectives and strategies of our competitors? (section 5.7)
What are the response patterns of our competitors? (section 5.8)
Which steps are involved with analysing competitors? (section 5.9)
How can we set up an organisation for competitor analysis and CI? (section 5.10)

Who are our competitors?
The danger when identifying competitors is that competitive myopia prevails (Levitt, 1960).
According to Levittâ&#x20AC;&#x2122;s thesis, the mission of a business should be defined broadly: an airline
might consider itself in the holiday business; a railway company should not consider other
railway companies as competitors but rather consider themselves as in the transport business,
competing with other transport methods such as roads and air.
Later on, Levittâ&#x20AC;&#x2122;s proposition was contradicted by some practical examples: among them
was Coca-Cola, which in the early 1980s extended its business from being a soft drinks
marketer to being a beverage company. Subsequently, the company bought three wine
companies.
Competition for a certain product can be defined clearly at every level of the hierarchy
shown in the examples of Figure 5.3.
The number of competitors grows as you go outwards from the centre. However, the terms
industry and product class do not get to the heart of competition or market definition.
A good definition of an industry is the following:
An industry should be recognisable as a group of products that are close substitutes to buyers,
are available to a common group of buyers, and are distant substitutes for all products not
included in the industry.

The key part of this definition is the fact that competition is defined by the customer, not by
the marketing manager; after all, it is the customer who determines whether two products or
services compete against each other.
An alternative way to define the competition that better incorporates the customerâ&#x20AC;&#x2122;s
perspective is also shown in Figure 5.3. The narrowest definition of competition that results
in the fewest competitors would include only products or services of the same product types
or brands. For a diet cola brand the narrowest way to define competition would be to include
only the other diet cola brands.
Although there may be some product variations, such as capacity, the most direct competitors are the brands that look like yours (first level of competition).
This narrow definition might be useful in the short term because these brands are
your most serious competitors on a day-to-day basis. It is also a convenient definition of
competition because it mimics the way commercial data services (e.g. A. C. Nielsen) often
measure market shares. However, this narrow definition may set an industry standard
for looking at competition and market shares in a way that does not represent the
true underlying competitive dynamics. Thus, the product type level, though perhaps
providing the set of the closest competitors, is too narrow for a longer-term view of
competition.

The second level of competition is based on products that have similar features and provide
the same basic function. In this type of competition, called product type competition, more
brands are considered to be competitors, such as Coca-Cola classic, Pepsi One and Caffeine
Free Diet Pepsi.
At the third level (product class competition), other competitors are considered to be other
soft drink brands such as Sprite, Dr Pepper and 7-Up. At the fourth level the products are
competing generically because they satisfy the same need; in Figure 5.3 this is the need of
thirst or the need of enjoying a beverage together with others.
The point is that there is a critical difference between generically defined competitors and
product form or product category competition. The latter two are inward orientated, whereas
generic competition is outward orientated. Product type and product class competitors
are defined by products that look like yours. Generic competitors are defined by looking
outside the firm to the customers. After all, the customer determines what products and services
solve the problem at hand. Although in some cases there may be a limited number of ways to
solve the same problem or provide the same benefit, in most instances focusing on the physical
product alone ignores viable competitors.

CHAPTER 5 Competitor analysis and intelligence

167

The final level of competition (level 5) is the most general level, as many products and
services are discretionary items purchased from the same general budget.
A person shopping in a department store in the housewares area faces many other
discretionary items for the home that are unrelated to making coffee or quenching thirst.
Products such as pots and pans and knives may find their way into the shopping basket and
could be viewed as substitutable in the budget. This kind of competition is called ‘budget
competition’.

5.3

How are the competitors interacting?
A competitive interaction occurs when a set of firms engages in a series of behaviours that
affect each other’s outcomes and/or behaviours over time. In this situation, the competitors
are ‘at war’; in other situations the interaction might be peaceful.
At a more general level, one can think of an interaction as consisting of a sequence of
events, occurring as follows. Our firm and the competitor firm engage in a set of actions (e.g.
marketing mix) that provoke a particular customer response.
While no interaction can be completely controlled, research and experience suggest that
companies can influence competitive interactions to their advantage. To do so, though, they
must know how to identify competitors, recognise their behaviours and the consequences,
and then design effective actions and reactions.
Between the two firms, A and B, three types of interaction are possible (see Table 5.1):
when each competitor is aware of the other’s effect on it, the interaction is an explicit one;
when neither competitor is aware of the other, the interaction is an implicit one; and when
one firm is aware of the interaction but the other is not, the interaction is asymmetric. Each
type of interaction is characterised by a typical pattern of behaviours.
In an explicit interaction, each firm is aware of its relationship with the other and attempts
to manage that relationship to its advantage. The relationship behaviours may be benign or
hostile. In a benign situation, the two firms work to maximise the profits of both partners
in the interaction by engaging in positive behaviours, such as joint marketing or product
development, or at least by avoiding negative behaviours such as price cuts. In this connection, openness regarding one’s own marketing strategy (e.g. Firm’s A) may be advantageous
because if the competitor (Firm B) realises that Firm A wants to focus on a special market
then Firm B may search for other attractive markets. In a hostile situation, each firm tries to
gain a sustainable advantage over the other, maximising its own gains. Explicit interactions
are what we usually think of when we consider competitor interactions, such as Coca-Cola
and Pepsi.
Table 5.1 Types of competitive interaction
Firm A
Aware

In an implicit interaction, the relationship is characterised by market behaviours alone.
Customer response to the two competitors’ actions creates certain outcomes for both organisations, but each firm is ignorant of the other’s effect on its business. This is most common in
markets with a large number of small competitors. For example, all restaurants in a given city
compete with each other to some degree. This also occurs when different companies meet the
same needs in very different ways.
In an asymmetric interaction, the aware firm has the opportunity to exercise stealth, taking
actions that the ignorant competitor will not see. Stealth may allow a firm to steal business
from competitors without their knowledge. Asymmetry often arises from differences in firm
size: the small firm knows well that it is in an interaction with the large firm, but for the large
firm the small firm is inconsequential.

eXhibit 5.1
McDonald’s and Burger King in an asymmetric interaction
In the fast-food industry, two leading players –
McDonald’s and Burger King – face the same
market trends but have responded in markedly different ways to the obesity backlash.
McDonald’s has rolled out a variety of foods
it promotes as healthy. Burger King has introduced high-fat, high-calorie sandwiches
supported by in-your-face, politically incorrect
ads. As the dominant player, McDonald’s is the
lightning rod for the consumer and government backlash on obesity. It cannot afford to
ignore these concerns. Smaller players like
Burger King, realising this, see an opportunity to cherry-pick a share in the less healthconscious fast-food segment. Burger King
competes asymmetrically.
Source: Adapted from Courtney et al. (2009).

How do we learn about our competitors?
CI activities theoretically can be performed by any person or department in an organisation,
not just by marketing or corporate strategy personnel. Traditional CI activities, unlike acts
of corporate espionage, include obtaining and analysing publicly disseminated or publicly
accessible information (such as annual reports) and engaging in routine transactions in open
product markets (such as buying and testing a competitorâ&#x20AC;&#x2122;s newest product). These activities
are generally viewed as being both legal and ethical (Calof and Wright, 2008).
Once a firm has decided to engage in CI, it can choose from the following classifications
of CI (Hannon, 1997).

Proactive or reactive CI
By definition, a proactive approach involves conscious, premeditated acts to avoid being
surprised. Proactive tactics include periodic surveillance, continuous monitoring and targeted
studies. These acts are more offensive, since they target and investigate identifiable and realistic threats. On the other hand, reactive, more defensive approaches are more likely to be
undertaken in response to competitive threats, whether they are actually realised or merely
expected. Of course, there are numerous cost/benefit trade-offs that affect how proactive or
reactive a company can be at any given time.

Formal or informal CI

Strategic business unit
(SBU)
A unit of the company
that has a separate
mission, strategy and
objectives, which can be
planned independently
from other company
business. An SBU can
be a company division,
a product line within a
division, or sometimes a
single product or brand.

Formal acquisition is usually much quicker, better organised and more responsive. As might
be imagined, it is usually also more expensive. Practically speaking, most formal corporate intelligence systems have at their core a staff that is charged with responsibility for CI
operating procedures, such as developing a modus operandi for the routine submission of
competitor reports. Alternatively, informal intelligence activities, which are the norm for
many Western organisations, are often uncoordinated, unfocused and shallow. Not surprisingly, they are usually less expensive. When companies adopt a reactive approach, whether by
design or default, individual employees, departments and strategic business units (SBUs) may
all be engaged in intelligence activities. Unfortunately, these efforts, more often than not, are
disjointed, ineffective and inefficient.
No matter how formally or informally the competition is to be monitored, it is imperative
for firms to a least identify those competitors who merit surveillance and determine if there
are appropriate information sources for finding out more about these companies.
Essentially, three sources of CI can be distinguished: what competitors say about themselves,
what others say about them and what employees of the firm engaged in competitive analysis
have observed and learnt about competitors. Much information can be obtained at low cost.
As far as information from its own sources is concerned, the company should develop a
structured programme to gather competitive information. First, a detailed information gathering programme must be developed. Second, salespeople may be trained to carefully gather
and provide information on the competition, using such sources as customers, distributors,
dealers and former salespeople. Third, senior marketing people should be encouraged to call
on customers and speak to them in-depth. These contacts should provide valuable information on competitorsâ&#x20AC;&#x2122; products and services. Fourth, other people in the company who happen
to have some knowledge of competitors should be encouraged to channel this information to
an appropriate office (Fleisher, 2008).
Information gathering on the competition has grown dramatically in recent years. Almost
all large companies designate someone especially to seek CI. SMEs will normally not have the
resources for that.

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The information-gathering techniques, summarised below, are all legal, although
some may involve questionable ethics. A responsible company should carefully review
each technique before using it to avoid practices that might be considered illegal or
unethical.

Gathering information from internal employees and employees
of competing companies
Firms can collect data about their competitors through interviews with new recruits or by
speaking with employees of competing companies.
When firms interview, for example, students for jobs, they may pay special attention to
those who have worked for competitors, even temporarily. Job seekers are eager to impress
and often have not been warned about what they can and cannot divulge.
Companies send engineers to conferences and trade shows to question competitors’ technical people.
Probably the oldest tactic in corporate intelligence gathering is when companies hire key
executives from competitors to find out what they know (Herstein and Mitki, 2008).

Gathering information from competitors’ customers
Some customers may give out information on competitors’ products. The close cooperative
relationship that engineers cultivate with the customer’s staff often enables them to learn what
new products competitors are offering.

Gathering information from competitors’ suppliers
A firm and its main competitor are sometimes supplied by the same subcontractor. As many
firms today have close relations with their suppliers, some information exchange may be
possible.

Gathering information by observing competitors or by analysing
physical evidence
Companies can get to know competitors better by buying their products or by examining
other physical evidence. Companies increasingly buy competitors’ products and take them
apart to determine costs of production and even manufacturing methods.

Gathering information from published materials and public documents
This type of material could be:
●
●
●
●

financial reports of the firm;
government reports;
company presentation brochures;
company portraits in industry journals.

Most of this information can be found on the Internet.

Why the Internet is a good source of CI
Internet resources will provide an array of basic information. To paraphrase the old saying,
‘All that glitters is not gold’, one should be reminded that just because it is on the Internet does
not mean it is accurate. WWW is not the source of data, it is the contact connect symbol. The
analyst must document the author, method of data collection, date, publisher location and
purpose of printing the data.
All too frequently, novices think they have an authoritative report if a portion of a report
is dotted with Internet footnotes. Experienced researchers question the authenticity of data

CHAPTER 5 Competitor analysis and intelligence

Reliability
If the same phenomenon
is measured repeatedly
with the same
measurement device
and the results are
similar then the method
is reliable (the ‘how’
dimension).

171

until there has been an opportunity to assess the reliability of the Internet (or any) data source.
Although sales exaggerations affect few people, the same practice on the Internet could lead
to vastly different conclusions unless the information and source credibility are questioned by
those who use information in making important strategic decisions.
Falsifying data on the Internet is rare. However, the inability to police the Internet could
lead to inaccurate, if not intentionally false, data inputs. Always keep in mind the fact that
it is up to the data collector to verify the quality of the information taken from the Internet.

Types of CI available
In the broadest sense, data sources are either free or available for a fee. Paid-for services are
of three types:
1 a database that charges a monthly fee for access to the data provided;
2 services that provide data to subscribers on a per-inquiry basis;
3 research reports that one can acquire from research firms.

Subscription services
There are many online data links that will give subscribers access to special databases. A
subscription to Lexis-Nexis is one possibility. Subscribers can get up-to-date information
direct from Lexis-Nexis (www.lexisnexis.com). Lexis contains legal materials, whereas Nexis
is not focused on legal issues, but is concerned about future interaction.
Lexis-Nexis is one of the leading business intelligence providers. Over 30,000 sources are
covered; 3 billion searchable documents make up their service. Over a million new documents are added every week.
Lexis-Nexis will provide reports on a regular basis (such as Lexis Monthly). Each of these
Lexis-Nexis monthly updates provides a list of any new articles on a selected subject that have
been published in the past month.

5.5

What are the strengths and weaknesses of our competitors?
Having identified our competitors and described how to collect CI, the next stage is to
complete a competitor audit in order to assess their relative strengths and weaknesses.
Whether competitors can carry out their strategies and reach their goals depends on their
resources, capabilities and their resulting strengths and weaknesses. A precise understanding
of competitor strengths and weaknesses is an important prerequisite for developing competitor strategy.
This information will enable predictions to be made about the competitor’s future behaviour and reactions. It is not sufficient to describe how the competitor is performing in terms
of market share and profits. A competitive analysis must diagnose how the competitor has
managed to generate such performance outcomes, be they good or bad. In particular, it
locates areas of competitive vulnerability. Military strategy suggests that success is most often
achieved when strength is concentrated against the enemy’s greatest weakness.
The process of assessing a competitor’s strengths and weaknesses may take place as part of
a marketing audit. As much internal, market and customer information as possible should be
gathered. For example, financial data concerning profitability, profit margins, sales and investment levels, market data relating to price levels, market share and distribution channels used,
and customer data concerning awareness of brand names, perceptions of brand and company
image, product and service quality and selling ability may be relevant.
Not all of this information will be accessible, and some may not be relevant. The management needs to decide the extent to which each piece of information is relevant. For example,

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the management must decide how much to spend on measuring customer awareness and
perceptions through market research. This process of data gathering needs to be managed so
that information is available to compare our company with its chief competitors on the key
factors for success in the industry.
A four-stage model, as represented by a competitive benchmarking, can then be used as
follows (the result of the competitive benchmarking can be seen in the upper-right corner of
Figure 3.3):
1 Identify the major attributes that customers value. Ask customers what features and per-

formance levels they look for in choosing a supplier or a product. Different customers will
mention different features and benefits (value chain functions). Assess the importance of
different attributes. Rate or rank the importance of different functions to customers. The
highest-ranked functions are called key success factors (KSFs).
2 Assess the company’s and the competitors’ performance on different value functions.
3 Examine how customers rate the company’s performance against a specific major competitor
on an attribute-by-attribute basis. The key to gaining competitive advantage is to take each
customer segment and examine how the company’s offer compares to that of its major
competitor. If the company’s offer exceeds the competitor’s offer on all important attributes,
the company can charge a higher price and earn higher profits, or it can charge the same price
and gain more market share. However, if the company is seen as performing at a lower level
than its major competitors on some important attributes, it must invest in strengthening those
attributes or finding other important attributes where it can gain an edge on the competitor.
4 Monitor customer values regularly. The company must review customer values and competitors’ standings periodically if it wants to remain strategically effective.
The competence profile for firm A in Figure 3.3 is an example of how a firm is not in accordance with the market (customer) demand in the form of key success factors. The company
has its core competences in parts of the value chain’s functions where customers place little
importance (e.g. market knowledge).
If there is generally a good match between key success factors and firm A’s initial position,
it is important to concentrate resources and improve this core competence to create sustainable competitive advantages.
If, on the other hand, there is a large gap between customers’ demands and the firm’s initial
position in key success factors as shown in Figure 3.3 (as with the personal selling functions),
it may give rise to the following alternatives:
●
●

As a new business area involves risk, it is often important to identify an eventual gap in a
critical success factor as early as possible. In other words, an early warning system must be
established that continuously monitors the critical competitive factors so that it is possible to
start initiatives that limit the size of an eventual gap as early as possible.
In Figure 3.3, the competence profile of firm B is also shown.
Assessing a competitor’s strengths and weaknesses begins with identifying relevant techniques and assets in the industry. Weaknesses might include resource limitations or lack of
capital investment. Ways of attacking competitors’ strengths and weaknesses include the
following:
●

●
●

attack geographic regions where a rival has a weak market share or is exerting less competitive effort;
attack buyer segments that a rival is neglecting or is poorly equipped to serve;
attack rivals that lag on quality, features or product performance; in such cases, a challenger
with a better product can often convince the most performance-conscious customers of
lagging rivals to switch to its brand;

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●

●

5.6

173

attack rivals that have done a poor job of servicing customers; in such cases, a serviceorientated challenger can win a rival’s disenchanted customers;
attack rivals with weak advertising and brand recognition; a challenger with strong marketing skills and a good image can often take sales from lesser-known rivals.

Market commonality and resource commonality
Chen (1996) proposed a model where both market commonality (market overlap) and
resource commonality (resource overlap) affect the awareness and motivation to take actions
and await competitive responses (see Figure 5.4). In this model, a competitor’s likelihood of
response is influenced by both market commonality and resource similarity.
The high market commonality between Samsung and HTC in smartphones explains the
fierce competition between these two companies. Samsung is based in South Korea and HTC
is based in Taiwan, but both companies are fighting over the huge Chinese market.
The high resource commonality between Amazon and eBay also explains the fierce rivalry
between these two companies. The two firms are both pure online businesses with few
tangible resources. Their main resources are their customer bases. eBay runs the largest
person-to-person auction website, connecting some 3.8 million buyers and sellers worldwide.

It helps people buy and sell collectibles and antiques as well as many other goods normally
sold through flea markets, antique stores and classified advertisements. The success of eBay’s
dynamic pricing system has been considered as a threat to Amazon’s dominance of the online
retail industry. So, in 1999, Amazon’s president Jeff Bezos launched Amazon’s auctions in
direct competition with eBay. As a reaction, eBay polled members on whether they would like
to see fixed-price auctions (many said yes) and dealer storefronts. This was a direct counterattack against Amazon’s fixed-price business model.

5.7

What are the objectives and strategies of our competitors?

Percentage of sales
Setting the promotion
budget at a certain
percentage of current or
forecasted sales, or as a
percentage of the unit
sales price.

Knowing a competitor’s objectives is crucial to predicting how it will respond to changes in
the environment, and if strategic changes are likely. Also, a company’s strategies are driven by
its goals and objectives. For example, in the USA K-Mart was alarmed by Wal-Mart’s entry
and expansion efforts into areas promising high growth potential.
Understanding the objectives of competitors can give guidance to strategy development on
three levels (Fahey, 2007). Goals can indicate where the company is intending to develop, and
in which markets (either by industry or internationally) major initiatives can be expected. The
areas of expansion could indicate markets that are to be particularly competitive but may also
signify that companies are not so committed. Where the intention is profitable coexistence, it
is often better to compete in areas that are deemed of secondary interest to major companies
rather than to compete directly.
Reward structures for staff can also indicate objectives. Where sales staff, for example,
are rewarded on a percentage of sales commission, that practice suggests that sales volume
(rather than profitability) is a key objective.
When competing against a diversified company, ambitious goals in one sector may indicate
that commitment to another is diminishing. Equally, very large and diversified companies
may often not be able to take advantage of their enormous financial strengths because of their
unwillingness to make strategic shifts in their resources. There is also a chance that financially
driven companies may be unwilling to take the risks of new ventures, preferring instead to
pick the bones of those who were damaged in taking the risk.
Also indicative of future goals can be the ownership structure of the competitor. Competitors owned by employees and/or managers may set a higher priority on providing continuity
of employment than those owned by conventional shareholders. Likewise, competitors in the
public sector may set higher priorities on social goals than profitability. Competitors owned as
part of diversified conglomerates may be managed for short-term cash rather than long-term
market-position objectives.

Assessing competitors’ current strategies
Assessing the current strategy involves asking the basic question: ‘What exactly is the competitor doing at the moment?’ This requires making as full a statement as possible of what
competitors are trying to do, and how they are trying to achieve it.
Three main sets of issues need to be addressed with regard to understanding current
competitor strategies, as follows:
1 identification of the market or markets they have chosen to operate in: their selection of

target markets;

2 identification of the way in which they have chosen to operate in those markets: the strate-

gic focus they are adopting with regard to the type of competitive advantage they are trying
to convey;
3 the supporting marketing mix that is being adopted to enable the positioning aimed for to
be achieved.

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Beyond these three core elements of strategy it can also be helpful to assess the organisation
of the marketing effort – the structures adopted – to facilitate implementation of the strategy.

Identification of competitors’ chosen markets
Prices
Competitors’ prices will often be an indicator of the target market. In grocery retailing, for
example, Aldi and Netto have consistently pursued a minimum-range, low-price strategy in
attempts to attract price-sensitive, bulk grocery purchasers rather than compete directly with
industry leaders such as Tesco and J. Sainsbury on quality and service.

Subsidiary
A company that is owned
by another.

Product features
The features built into products and the type and extent of service offered will be good indicators of the types of customer the competitor is seeking to serve. In the car industry, for
example, the products made by Jaguar, a subsidiary of Ford, indicate clearly the types of
customer being pursued. Skoda, on the other hand, now owned by Volkswagen, offers very
different cars to the market – suggesting a completely different target market.
Advertisements and other promotional materials can also give clues as to what the target
markets are. The wording of advertisements indicates the values the advertiser is attempting to
convey and imbue in the product or service offered. Traditional Volvo advertising has clearly
focused on safety, which appeals to safety-conscious, middle-class families. BMW advertising concentrates on technical quality and the pleasures of driving, suggesting a younger
target market. The media in which the advertisements appear, or the scheduling adopted, will
also give indications of the target market aimed for. Similarly, the distribution channels the
competitor chooses to use to link the customer with offerings may give clues as to the targets
it is aiming for.

Competitors’ strategic focus

Cost leadership
The achievement of the
lowest cost position in an
industry, serving many
segments.

As discussed in the competitive triangle model (see Chapter 3), there are two main routes to
creating a competitive advantage. The first is through low costs relative to competitors. The
second is through providing valued uniqueness – differentiated products and services that
customers will be willing to pay for.
Competitors may be focusing on cost-reducing measures rather than expensive product
development and promotional strategies. If competitors are following this strategy, it is more
likely that they will be focusing research and development expenditure on process rather than
product development in a bid to reduce manufacturing costs.
Information about a competitor’s cost structure is valuable, particularly when considering
a low-cost strategy. Such cost-structure information should include the competitor’s overheads, all costs, investments in assets and size of labour force.
The most effective competitors compete on the basis of value, offering superior quality,
price and reliability. A company with exclusive access to specific raw materials establishes
a differential advantage over its competitors. Strategically manoeuvring the variables
of the marketing mix can give the company a special edge over competitors. The cost
leadership route is a tough one for any firm to follow successfully and requires close,
relentless attention to all cost drivers. As noted above, in the UK grocery market Aldi
and Netto have adopted this rigorous approach, restricting product lines and providing a
‘no-frills’ service.
Providing something different, but of value to customers, is a route to creating competitive advantage that all players in a market can adopt. The creative aspect of this strategy is to
identify those differentiating features on which the firm has, or can build, a defensible edge.
Signals of differentiation will be as varied as the means of differentiation. All are highly visible
to competitors and show the ground on which a given supplier has chosen to compete.
Strategies can also be defined in terms of competitive scope. For example, are competitors attempting to service the whole market, a few segments or a particular niche? If the

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competitor is a niche player, is it likely that it will be content to stay in that segment or use it
as a beachhead to move into other segments in the future? Japanese companies are renowned
for their use of small niche markets as springboards for market segment expansion (e.g. the
small car segments in the USA and Europe).
Knowing the strategic thrust of competitors can help our strategic decision making. For
example, knowing that our competitors are considering expansion in North America but not
Europe will make expansion into Europe a more attractive strategic option for our company.

Competitors’ supporting marketing mix
Analysis of the marketing mix adopted by competitors can give useful clues as to the target
markets at which they are aiming and the competitive advantage they are seeking to build
with those targets. Analysis of the mix can also show areas where the competitor is vulnerable
to attack.

The four Ps
Product
At the product level, competitor analysis will attempt to deduce positioning strategy. This
involves assessing a competitor product’s target market and differential advantage. The
marketing mix strategies (e.g. price levels, media used for promotion, distribution channels)
may indicate the target market, and market research into customer perceptions can be used
to assess relative differential advantages.
Companies and products need to be monitored continuously for changes in positioning
strategy. For example, Volvo’s traditional positioning strategy based on safety has been modified to give more emphasis to performance.

Price
Analysis of competitor pricing strategies may identify gaps in the market. For example, a
company marketing vodka in the USA noted that the leader offered products at a number of
relatively high price points but had left others vacant. This enabled the firm to position its own
offerings in a different market sector.

Place
Understanding the distribution strengths and weaknesses of competitors can also identify
opportunities. Dell, for example, decided to market its PCs direct to businesses rather than
distribute them through office retail stores where their established competitors were already
strong.

Promotion
Both the message and the media being used by competitors warrant close analysis. Some
competitors may be better than others at exploiting new media such as satellite or cable.
Others may be good in using public relations. Again, analysis will show where competitors
are strong, and where they are vulnerable.

5.8

What are the response patterns of our competitors?
The ultimate aim of competitor analysis is to determine competitors’ response profiles – that
is, how a competitor might behave when faced with various environmental and competitive
changes.

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To succeed in predicting a competitor’s next move, the marketing manager has to have a
good feel for the rival’s situation, how its managers think and what its options are. Doing the
necessary research can be time consuming since the information comes in bits and pieces
from many sources. But scouting competitors well enough to anticipate their next moves
allows managers to prepare effective countermoves and to take rivals’ probable actions into
account in designing the best course of action.
In evaluating the response patterns of our competitors the following questions are
important:
●

●

●

Is the competitor satisfied with the current position? If yes, this competitor may allow
indirect competitors to exploit new markets without being perturbed. Alternatively, if this
competitor is trying to improve its current position, it may be quick in chasing market
changes or be obsessed by improving its own short-term profits performance. Knowledge
of a company’s future goals will clearly play an important part in answering this question.
What likely moves or strategy shifts will the competitor make? History can provide some
guide as to the way that companies behave. Goals, assumptions and capabilities will also
give some guidance to how the company can effectively respond to market changes. After
looking at these a company may be able to judge which of its own alternative strategies is
likely to result in the most favourable reaction on the part of the competitors.
Where is the competitor vulnerable? In a competitive market, success is best achieved by
concentrating strength against weakness. It is foolish for a firm to attack a market leader in
areas where it is strongest.

The complacency of leaders in markets can provide major opportunities. The competitor’s
own feeling of invulnerability may be the weakness that could lead them to a downfall. What
will provoke the greatest and most effective retaliation by the competitor?
Whereas market leaders may accept some peripheral activity, because of the low margins
they perceive, or the low market volume involved, other actions are likely to provoke intense
retaliation. This is often the case in price-sensitive markets, where one competitor reduces the
price (e.g. reducing petrol prices) in the hope of gaining market share. Sometimes the market
leader may even go to the business press and claim that every price cut would be matched;
such a step may then prevent a fierce price war.

EXHIBIT 5.2
Role play in CI as a predictor of competitive behaviour
At last, it’s time to pull all of this together and come to something you can really use. Here are the vital sub-steps:
●

Write a ‘competitive novel’. If the competitor were a novel, what would be going on inside the heads of its key characters (including how they think about you)? Try this as an actual written exercise.

●

Role play some possible sequels to the story so far. Given what you’ve learnt of the goals and assumptions that drive
the competitor (and those that drive your own company), how would they respond to actions you have planned?
How would you then respond? Play two or more rounds against your plans, not in an effort to absolutely predict
what the competitor’s actions will be, but to understand what kind of moves they would consider and to make sure
that you are prepared to deal with the consequences.

●

Assess results and identify new questions. Nothing is static in the competitive world. As you assess the results of your
effort, new questions will arise. Given the possible response scenarios you’ve developed, it may now be important
to know, for instance, whether they could launch their new product in 7 months, or whether it has to be 18. These
critical questions become worthy of further research, analysis and monitoring.

Source: Adapted from House (2000).

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A result of the above is that most competitors fall into one of four categories:
1 The laid-back competitor: a competitor that does not react quickly or strongly to a rival’s

move. Reasons for a slow response vary. Laid-back competitors may feel their customers
are loyal; they may be milking the business; they may be slow in noticing the move; they
may lack the funds to react. Rivals must try to assess the reasons for the behaviour.
2 The selective competitor: a competitor that reacts only to certain types of attack. It might
respond to price cuts, but not to advertising expenditure increases. Shell and Q8 are
selective competitors, responding only to price cuts but not to promotions. Knowing
what a key competitor reacts to gives its rivals a clue as to the most feasible lines of
attack.
3 The tiger competitor: a competitor that reacts swiftly and strongly to any assault. Procter &
Gamble does not let a new detergent come easily into the market.
4 The stochastic competitor: a competitor that does not exhibit a predictable reaction pattern.
There is no way of predicting the competitor’s action on the basis of its economic situation,
history or anything else. Many SMEs are stochastic competitors, competing on miscellaneous fronts when they can afford to.
The aim of this step is to force a company to look beyond its own moves and towards those of
its competitors and, like a great player of chess, think several moves ahead. It involves a firm
thinking of its moves in a broad, strategic framework rather than the incremental manner
in which strategies often emerge. Otherwise, by following a series of seemingly small incremental shifts in pricing and promotion, a firm may be perceived to be making a major play in
the marketplace and thus incur the wrath of major players.

5.9

Six steps to competitor analysis
There is no doubt that competitive pressure will continue to intensify in all markets. The
forces that are active now are unlikely to diminish in the near future. Competitor intelligence
is a powerful new management tool that enhances a firm’s ability to succeed in today’s highly
competitive global markets. It provides early warning intelligence and a framework for better
understanding and countering of competitors’ initiatives. Competitive activities can be monitored in-house or assigned to an outside firm. The scope for the development of the competitor analysis system could be a particular country, a business division in the company or the
global perspective of the marketplace. The company should develop a system that becomes
sensitive to any signal that the competitors are about to change the way they operate, so that
the company can anticipate their moves with a planned response (Fong and Wong, 2012);
Johns and Doren, 2010; Tseng, 2009).
The six principal steps to competitor analysis are as follows.

1 Identifying your company’s competitors
The company as such may have one set of competitors (e.g. conglomerates), while the specific
local markets and the company divisions may have their own specific competitors. Ideally,
competitors should be identified country by country and product line by product line, at
the most detailed level possible. But in reality only a few companies will be identical to your
own company. As we have seen, there may be differences in the geographic markets or in the
products offered to the markets. In the first round, the company should analyse a core group
of competitors, but it should also keep an eye on the profiles of the customers, suppliers and
distributors as useful indicators to possible new entrants into the company’s market. Porter’s
five forces model can be useful in this connection.

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2 Identifying the information required and the information
sources of competitor intelligence
The company must select the quantitative and qualitative information that the company
needs in order to identify the competitors’ current and potential strategies. The competitor
intelligence system must be designed to provide easy access to the facts about the
competitors, but also, even more importantly, to help the company managers to understand
what the competitors are doing and why it works. The ultimate objective of the system is to
gather today’s information in order to participate what the competitor will do tomorrow.
In order to get hold of the necessary competitor data, the company must identify the
necessary external and internal data sources. Today it is very popular (also because it is
cheap) to collect (secondary) competitor data on the Internet, but a competitor intelligence
system will only succeed if it has numerous person contributors (providing primary data),
because each person’s perspective and data is unique. For example, the internal salesforce
(and to some degree the distributors) can contribute with information about a customer’s
viewpoint on the company’s product and services versus the competitor’s. An important
question to answer is how often the competitor profiles should be updated. In addition to
formal profiles, updates concerning competitors on the ‘watch list’ should be circulated
routinely. An efficient way to do this is to scan the Internet once a week for abstracts of new
articles added in the previous week, and to use an internal mail system to send the new data
to the proper parties.

3 Analysing strengths and weaknesses of competitors
with respect to the market requirements
The company should look at each of the functional aspects of the competitors’ value
chain, in light of the local markets where the competitors are operating. Each rival firm’s
strengths and weaknesses should be summarised. For example, in manufacturing, the
process of analysing how competitors are producing products in an efficient and effective
manner, and at what costs, is important. Service companies will need to evaluate how well
competitors are providing what they promise. Are the competitors meeting the requirements and expectations of the customers? How innovative are competitors in the product/
service development? Do competitors take advantage of economies of scale on a local,
regional, or worldwide basis? Similar questions should be asked within the marketing
function. Does the competitor have a strong brand image? How well are the competitors’ communication messages reaching their target customers? To what degree do the
competitors use social media to reach target customers?
Finally, it is also important to assess the profitability and financial soundness of each
competitor in relation to the industry average.

4 Assessing the company’s competitive position
vis-à-vis key competitors
It is important that the company compares itself on the same value chain functions as
those chosen in step 3. Sometimes it is a good idea to let customers evaluate the company’s
performance compared to the main competitors’ performance, as indicated in the competitive benchmarking competence profile (Figure 3.3’s upper-right corner model) and further
specified in Figure 3.6. In other words, does the company have stronger functional value
chain competences, a quicker response to competitive moves, more flexibility, or a more
sustainable advantage than its competitors? Having done all this, the final step is then to
focus on the implications of this strength and weaknesses analysis for the company’s future
strategies (see step 6).

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5 Investigating the goals and long-term strategies of competitors
The first four steps have concentrated on analysing the current business of the competitors.
But how can we get a look into the competitors’ future strategies? The answer is of course
that we should try to obtain information about competitors’ long-term goals and objectives.
The goals of the competitor set the stage for future actions and strategies. For example, if the
competitor chooses aggressive market share objectives in a specific local market, the strategies could be more daring – such as an own subsidiary, or a joint venture with a host national
firm. Or it could have strong emphasis on new product/service development, which could be
region- or country specific, rather than more status quo types of strategies, such as exporting
without any culture-specific modifications or more passive market-entry modes. Sometimes
these indications of the competitors’ long-term strategy can be revealed in the competitors’
annual reports or stock exchange reports. Also the CEO’s performance in mass media (e.g.
on TV business programmes, such as CNBC or Bloomberg) can provide clues as to where
a competitor is heading. Does the CEO look aggressive or conservative; risk-orientated or
risk-averse; authoritarian or people-orientated? These clues can provide important indications about the corporate culture and values, the business philosophy and the shape of the
future direction of the competitor.

6 Selecting the company strategies to compete against
the competitor, locally and globally, taking into account
possible competitor reactions
The final step is to translate this competitor analysis into a possible revised strategy and
action plan for the company itself. If the analysis reveals that the company has a lower market
performance versus the key competitors, the company should try and close these gaps by
investing in new resources, training and other value chain functions where the company
is weaker than the competitor in the eyes of the customers. Another strategy is to ‘forget’
about the weaknesses (compared to key competitors) and instead capitalise on the company’s
strengths versus the competitors. Sometimes a company is faced with competitors who have
been in a country market for many years and have made considerable investment in adapting
their strategies to fit the local market environment. In this situation, the company (as a new
entrant) may be more successful with innovative responses and niche market strategies.

5.10

How can we set up an organisation for competitor analysis
and CI?
Within the organisation, competitive information should be acquired both at the corporate
level and at the SBU level. At the corporate level, competitive intelligence is concerned with
competitors’ investment strengths and priorities. At the SBU level, the major interest is in
marketing strategy – that is, product, pricing, distribution and promotion strategies that a
competitor is likely to pursue. The true pay-off of CI comes from the SBU review with a regard
to a specific geographic market.
When establishing an international CI structure, there are several ways of constructing
the responsibilities based on geographic information needs, resources available and anticipated demand. When anticipated demand is low, the assignment of international responsibilities should probably fall to the initial project analyst. When anticipated demand is high or
moderate, more formal structures are beneficial.
When staffing is limited, a single individual may need to be assigned to cover the entire
world. A better format, though, is to divide the world’s regions among the CI team. If only a

CHAPTER 5 Competitor analysis and intelligence

181

EXHIBIT 5.3
Counterintelligence done by Johnson Controls against Honeywell
As a company you should try to find out what the competitors are doing today and in the future. However, you should
also be aware that you are being monitored by your competitors. Then how do you protect your secrets? That is what
counterintelligence is about. The counterintelligence professional needs to know what must be protected, for how
long, and from whom.
Sometimes it helps for the company to create a smokescreen. Johnson Controls (based in Milwaukee, USA) used
this tactic against its main competitor, Honeywell (based in Minneapolis, USA), in 1990. The starting point for this case
was a fierce competition between the two companies, especially in the US market, where both companies had around
30 per cent of the market share in building control systems.
Johnson Controls wanted to hide that they (in 1990) had spent three years and $20 million developing a new
building control system, which was given the code name ‘Loba’ (after the Russian mathematician Nikolai Lobachevski).
In order not to reveal this ambitious project to Honeywell before the actual launch, Johnson Controls created a
smokescreen in the form of developing a lower-level product, which was called ‘Lobo’ (Logical Option for Building
Systems). Just a one-letter difference from Loba, but it made all the difference when Johnson Controls decided to
confuse Honeywell about what was really happening. Some Honeywell sales people had heard rumours about a new,
forthcoming system from Johnson Controls. What really happened was that Johnson Controls took the low-level Lobo
product and invested a few hundred thousand dollars in some newsletters and an ad campaign, in order to promote
the new Lobo product. When Honeywell recognised Lobo for the low-level product that it really was, it abandoned its
interest in Johnson Controls at that time – just long enough for Johnson Controls to finish its development and beta
testing of the real front-runner, Loba. With this counterintelligence and smokescreen strategy Johnson Controls gained
first-to-market advantages and a significant share in the multi-billion-dollar market.
Source: Adapted from Wesley (1990).

single region is of interest, such as Latin America, and the CI team has two full-time analysts,
then assign each one half of the region; one would have South America, while the other would
focus on, say, Central America, Mexico and the Caribbean. This division allows familiarity
with and understanding of the culture, people, governments and commercial structures
to grow. If only specific countries are being examined, then split them equally among the
analysts.

Expanded human resources/single responsibility
In the event that budget or staffing can allow for specialists in specific international regions
then, based on demand, assign those responsibilities accordingly. A critical component of a
single responsibility focus is the ability to maintain perspective within the scope of the organisation as a whole. The danger of confusing significant and insignificant information can be a
problem when analysts are not able to maintain size and scope perspectives.
Should the CI team be able to hire someone specifically for an internationally focused
intelligence assignment, then background and experience in that culture may be preferable
but education and international orientation are the primary objectives. Specific requirements
include: active reading and listening skills to break down artificial or secondary barriers
caused by translation; interest and enjoyment in working with people from other socioeconomic backgrounds and cultural upbringing; and awareness of the home culture’s biases,
expectations and beliefs. In other words, hire someone who understands and is sensitive to
these cultural elements.

182

Part II Assessing the external marketing situation

5.11

Summary
This chapter has explored the key issues in analysing competitors and creating competitive
advantage. Firms need to understand their competitors because corporate success results
from providing more value to customers than the competition (the competitive triangle). To
prepare an effective marketing strategy, a company must study its competitors as well as its
actual and potential customers.
Competitor analysis and CI focus on competitor identification, an audit of competitor
capabilities (strengths and weaknesses), their objectives and strategies and prediction of
response patterns. The aim is to provide a basis for creating a competitive advantage, anticipating future actions and estimating how they will react to future actions your own company
may take.
There is no doubt that competitive pressure will continue to intensify in all markets. The
forces that are active now are unlikely to diminish in the near future. Increasing numbers
of companies will start to collect CI from internal and external sources and the number of
specialists from whom they can outsource will grow.
As important as a competitive orientation is in todayâ&#x20AC;&#x2122;s global market, companies should not
overdo the emphasis on competitors. Companies should manage a good balance of consumer
and competitor monitoring.
In the next chapter we shall see how it might be beneficial to enter into relationships with
former competitors.

On a lovely spring morning in 2011, while giving her kids
some Cheerios, the CEO of Cereal Partners Worldwide S.A.
(CPW), Carol Smith, thinks about how CPW might expand
international sales and/or capture further market shares in
the saturated breakfast cereals market. Right now, CPW is
the No. 2 in the world market for breakfast cereals, but it is
a tough competition, primarily with the Kellogg Company,
which is the world market leader.
Perhaps there are other ways of gaining new sales in
this competitive market? Carol has just read the business
best-seller Blue Ocean Strategy and she is fascinated by
the thought of moving competition in the cereals breakfast market from the red to the blue ocean. The question
is: how?
Maybe it would be better just to take the head-on battle
with Kellogg Company. After all, CPW has managed to beat
Kellogg in several minor international markets (e.g. in the
Middle and Far East).
The children have finished their Cheerios and it is time
to drive them to the kindergarten in Lausanne, Switzerland,
where CPW has its headquarters. Later that day, Carol has
to present the long-term global strategy for CPW, so she
hurries to her office, and starts preparing the presentation.
One of her marketing managers has prepared a background
report about CPW and its position in the world breakfast
cereals market. The following shows some important parts
of the report.

The Washburn Crosby Company, a predecessor to
General Mills, entered the market during the 1920s. The
company’s first ready-to-eat cereal, Wheaties, was introduced to the American public in 1924. According to General
Mills, Wheaties was developed when a Minneapolis clinician spilled a mixture of gruel that he was making for his
patients on a hot stove.

Cereal Partners Worldwide
Cereal Partners Worldwide was formed in 1990 as a
50:50 joint venture between Nestlé and General Mills (see
Figure 1 ), in order to produce and sell ready-to-eat breakfast cereals worldwide outside the US and Canada. CPW has
a portfolio of over 50 brands, including Cheerios, Nesquik
and Shredded Wheat.

General Mills
General Mills, a leading global manufacturer of consumer
food products, operates in more than 30 global markets and
exports to over 100 countries. It has 66 production facilities:
34 are located in the US; 15 in the Asia/Pacific region; six in
Canada; five in Europe; five in Latin America and Mexico;
and one in South Africa. The company is headquartered in

History of breakfast cereals
Ready-to-eat cereals first appeared during the late 1800s.
According to one account, John Kellogg, a doctor who
belonged to a vegetarian group, developed wheat and corn
flakes to extend the group’s dietary choices. John’s brother,
Will Kellogg, saw potential in the innovative grain products and initiated commercial production and marketing.
Patients at a Battle Creek, Michigan, sanitarium were among
Kellogg’s first customers.
Another cereal producer with roots in the nineteenth
century is the Quaker Oats Company. In 1873, the North
Star Oatmeal Mill built an oatmeal plant in Cedar Rapids,
Iowa. North Star reorganised with other enterprises and
together they formed Quaker Oats in 1901.

+

General Mills

Nestlé
50%

50%

Cereal Partners Worldwide (CPW)

R&D

Production

Marketing

Sales and
services

General Mills

Nestlé

Upstream

Downstream

Figure 1 The CPW joint venture

184

part ii ASSeSSInG THe exTeRnAl MARKeTInG SITuATIon

Minneapolis, Minnesota. In financial year 2009, the total net
sales were uS$15.9 billion of which 15 per cent came from
outside the uS. The company has 30,000 employees.
In october 2001, General Mills completed the largest
acquisition in its history when it purchased the Pillsbury
Company from Diageo. The uS$10.4 billion deal almost

doubled the size of the company, and consequently
boosted General Mills’ worldwide ranking, making it one of
the world’s largest food companies. However, the company
is heavily debt-laden following its Pillsbury acquisition,
which will continue to eat into operating and net profits for
the next few years.

Source: The Nestlé name and image are reproduced with kind permission of Société des Produits Nestlé SA.

part Ii CASE STUDY

The company now has more than 100 US consumer
brands, including Betty Crocker, Cheerios, Yoplait,
Pillsbury Doughboy, Green Giant and Old El Paso. Integral to the successes of General Mills has been its ability
to build and sustain huge brand names and maintain
continued net growth. Betty Crocker, originally a pen
name invented in 1921 by an employee in the consumer
response department, has become an umbrella brand for
products as diverse as cookie mixes to ready meals. The
Cheerios cereal brand, which grew rapidly in the US postwar generation, remains one of the top cereal brands
worldwide.
However, heavy domestic dependence leaves the
company vulnerable to variations in that market, such as
supermarket price-cutting or sluggish sales in prominent
product types such as breakfast cereals.
Internationally, General Mills uses its 50 per cent stake
in CPW to sell its breakfast cereals outside North America.
Cereal sales have faced tough competition recently, leading
to significant drops in sales, particularly tough competition
from private labels.

Nestlé
Founded in 1866, Nestlé is the world’s largest food and
beverage company in terms of sales. The company began
in the field of dairy-based products and diversified to food
and beverages in the 1930s. Nestlé is headquartered in
Vevey, Switzerland, and has 500 factories in 83 countries.
It has about 406 subsidiaries located across the world.
The company employs 247,000 people around the world,
of which 131,000 employees work in factories, with the
remainder working in administration and sales.
Nestlé’s businesses are classified into six divisions based
on product groups, which include beverages; milk products,
nutrition and ice cream; prepared dishes and cooking aids;
chocolate, confectionery and biscuits; pet care; and pharmaceutical products. Nestlé’s global brands include Nescafé,
Taster’s Choice, Nestlé Pure Life, Perrier, Nestea, Nesquik,
Milo, Carnation, Nido, Nestlé, Milkmaid, Sveltesse, Yoco,
Mövenpick, Lactogen, Beba, Nestogen, Cerelac, Nestum,
PowerBar, Pria, Nutren, Maggi, Buitoni, Toll House, Crunch,
Kit-Kat, Polo, Chef, Purina, Alcon and L’Oréal (in which it has
an equity stake).
Nestlé reported net sales of $120 billion for the fiscal
year 2010.

CPW
CPW markets cereals in more than 130 countries, except
for the US and Canada, where the two companies market
themselves separately. The joint venture was established
in 1990 and the agreement also extends to the production of private-label cereals in the UK. Average yearly

185

volume growth for CPW was 4 per cent for the period
2005–10. The company ’s cereals are sold under the Nestlé
brand, although many originated from General Mills.
Brand names manufactured (primarily by General Mills)
under the Nestlé name under this agreement include
Corn Flakes, Crunch, Fitness, Cheerios and Nesquik.
Shredded Wheat and Shreddies were once made by
Nabisco (before their acquisition by General Mills), but
are now manufactured by General Mills and marketed
by CPW.
The CPW turnover in 2010 was a little less than US$3
billion. CPW has 14 factories in 11 countries: UK, two factories; France, two factories; Poland, two factories; one factory
in each of Portugal, Russia, China, the Philippines, Australia,
Mexico, Chile and Brazil.
There are four research and development centres; US,
UK, Switzerland and Australia. The research centres focus
on breakfast cereal solutions that deliver consumer benefits, such as improved nutritional content, freshness, taste
and texture. CPW employs nearly 4,000 people all over the
world.
When CPW was established in 1990, each partner
brought distinctive competences into the joint venture.
●

CPW is number two in most international markets, but
it is also market leader in some of the smaller breakfast
cereal markets like China (60 per cent), Poland (50 per cent),
Turkey (50 per cent), East/Central Europe (40 per cent) and
South-east Asia (40 per cent).

The world market for breakfast cereals
In the early 2000s breakfast cereal makers were facing
stagnant, if not declining, sales. Gone are the days of the
family breakfast, of which a bowl of cereal was standard
fare. The fast-paced American lifestyle has more and more
consumers eating breakfast on the go. Fast-food restaurants
like McDonald’s, ready-to-eat breakfast bars, bagels and
muffins offer consumers less labour-intensive alternatives
to cereal. Although the value of product shipped by cereal
manufacturers has grown in absolute figures, increased
revenues came primarily from price hikes rather than
market growth.

English-speaking nations represented the largest cereal
markets. Consumption in non-English markets was estimated at only one-quarter the amount consumed by English
speakers (see Table 1), where the breakfast cereal consumption per capita is 6 kg in the UK, but only 1.5 kg in southwest Europe (France, Spain and Portugal). On the European
continent, consumption per capita averaged 1.5 kg per year.
Growth in the cereal industry has been slow to nonexistent in this century. The question at hand for the industry
is how to remake cereal’s image in light of the new culture.
Tinkering with flavourings and offerings, such as the recent
trend toward the addition of dried fresh fruit, provides some
relief, but with over 150 different choices on store shelves
and 20 new offerings added annually, variety has done more
to overwhelm than to excite consumers. In addition, cereal
companies are committing fewer dollars to their marketing
budgets.

Development in geographical regions
As seen in Table 2, the US is by far the largest breakfast
cereals market in the world. In total North America
accounted for 42 per cent of the global sales of $28 billion in
2010. The US accounted for about 90 per cent of the North
American market.

Table 2 World market for breakfast cereals by
region – 2010
Region

Billion US$

North America

12

42

Europe (west + east)

8

29

Rest of the world

8

29

28

100

Total

%

The European region accounted for 29 per cent of global
sales, at $8 billion in 2010. By far the largest market is the
UK, contributing nearly 40 per cent of the regional total,
with France and Germany as the key countries in breakfast cereals. Eastern Europe is a minor breakfast cereal
market, reflecting the product’s generally new status in the
region. However, the market is vibrant, as new lifestyles
born from growing urbanisation and westernisation –
key themes in emerging market development – have
fuelled steady sales growth. Despite its low level of percapita spending, Russia is the largest market in eastern
Europe, accounting for over 40 per cent of regional sales
in 2010. The continued steady growth of this market
underpinned overall regional development over the
review period. Cereals remain a niche market in Russia,
as they do across the region, with the product benefiting
from a perception of novelty. A key target for manufacturers has been children and young women, at whom
advertising has been aimed.
The Australasian breakfast cereals sector, like western
Europe and North America, is dominated by a single
nation, Australia, and is becoming increasingly polarised. In
common with the key US and UK markets, breakfast cereals
in Australia are suffering from a high degree of maturity,
with annual growth at a low single-digit level.
The Latin American breakfast cereals sector is the third
largest in the world, but at US$2 billion in 2010, it is notably
overshadowed by the vastly larger North American and
western European markets. However, in common with
these developed regions, one country plays a dominant
role in the regional make-up: Mexico, accounting for nearly
60 per cent of the overall breakfast cereal markets in Latin
America.
In common with eastern Europe, breakfast cereal sales,
whilst small in Africa and the Middle East, have displayed
marked growth in recent years as a direct result of greater
urbanisation and a growing trend (in some areas) towards
westernization. Given the overriding influence of this factor
on market development, sales are largely concentrated in
the more developed regional markets, such as Israel and
South Africa, where the investment by multinationals has
been at its highest.
In Asia the concept of breakfast cereals is relatively new,
with the growing influence of western culture fostering a
notable increase in consumption in major urban cities.
Market development has been rapid in China, reflecting
the overall rate of industry expansion in the country,
with breakfast cereals sales rising by 15 per cent in 2010,
although the per capita consumption is still very low (see
Table 1). In the region’s developed markets, in particular
Japan, market performance is broadly similar, although the
key growth driver is different, in that it is health. Overall,
in both developed and developing markets, breakfast
cereals are in their infancy. Per-capita consumption rates

part iI CASE STUDY

(Table 1) are still very low, leaving considerable scope for
future growth.

CPW penetrates emerging markets, like
Russia and China
Cereal Partners Worldwide has performed best in developing markets such as Russia and China, where market
leader Kellogg has not yet established a strong presence.
Although in 2010 the Russian and Chinese markets were
still relatively small in global terms (with $260 million and
$71 million of sales in a $23 billion global industry), they
are growing rapidly. Moreover, percapita consumption rates
are still very low (particularly in China), leaving considerable
scope for future growth.
The Nestlé brand has had a presence in the Chinese
packaged food market since 1990, providing an excellent springboard for the launch of CPW in the country.
CPW itself entered the Chinese breakfast cereals market
in 2004, when it opened a manufacturing facility in the
city of Tianjin, and it has relied on a combination of strong
branding and intensive marketing to gain market share,
particularly in children’s cereals, where its market share
stood at 60 per cent in 2008.
All of CPW’s breakfast cereals are marketed under the
name ‘Que Cao’, which means bird’s nest in Mandarin. This
name, together with a universal visual identity/logo and the
tagline ‘Choose quality, choose Nestlé’, is the cornerstone
of its Chinese marketing strategy, appearing on packaging,
point-of-sale materials and media advertising. In-store
promotions and sampling are also utilised. Moreover, unlike
many of its indigenous rivals, CPW can afford to spend
heavily on television advertising.
Thus the marketing of these breakfast cereals is integrated into a wider portfolio of products. However, this
approach is not without its dangers, as demonstrated in
2005 when Nestlé’s reputation in China took a hit after its
baby formula was found to be contaminated with iodine. In
this case, the fallout from the scandal does not seem to have
had a serious impact on the Chinese operations of CPW.
In addition, CPW’s marketing strategy in China is predicated on segmenting the market into two groups: urban
and rural customers. It targets its latest and most innovative
products at the wealthier urban population, which became
the majority in 2011, emphasising issues relating to health
and wellness. In terms of China’s diminishing rural population, who have significantly less disposable income than
their urban counterparts, it takes a lower-cost approach,
adapting existing product lines and highlighting such issues
as basic nutrition and affordability, as well as quality and
safety.
In China there are two contradictory forces at play.
Although the country ’s birth rate fell significantly, mainly

187

due to the government’s one-child policy, disposable
income is rising rapidly, so families now have much more
money to spend on each child. As a result, the current
generation, dubbed China’s ‘little emperors’ by some
marketers, would appear to be a ripe market for premium
and value-added products, which CPW will have to
exploit if its leadership of this category is not to be overtaken. None of CPW’s three children’s breakfast cereals
brands in China, Trix, Star and Koko Krunch, are particularly healthy, which may make the company vulnerable to
competitors with stronger health and wellness plays, as
issues such as childhood obesity come more to the fore
in China.
Another risk for CPW is that it is relatively weak in hot
cereals, which accounted for more than 50 per cent of the
total Chinese breakfast cereals sales in 2010.

Health trend
With regard to health, breakfast cereals have been hurt
by the rise of fad diets such as the Atkins and South Beach
diets, which have heaped much scorn on carbohydratebased products. The influence of these diets is on the wane,
but their footprint remains highly visible on national eating
trends. In addition, the high sugar content of children’s
cereals has come under intense scrutiny, which caused
a downturn in this sector, although the industry is now
coming back with a range of ‘better for you’ variants.
Regarding convenience, this trend, once a growth
driver for breakfast cereals, has now become a threat, with
an increasing number of consumers opting to skip breakfast. Portability has become a key facet of convenience, a
development that has fed the emergence and expansion
of breakfast bars at the expense of traditional foods, such
as breakfast cereals. In an increasingly cash-rich, timepoor society, consumers are opting to abandon a formal
breakfast meal and instead are relying on an ‘on-the-go’
solution, such as breakfast bars or pastries. These latter
products, in particular breakfast bars, are taking a share
from cereals, a trend that looks set to gather pace in the
short term.

Trends in product development
The market for breakfast products will continue to be influenced by factors such as the speeding up of society, the
entry of more women into the workforce and the further
growth of single- and two-person households as people
delay marriage and have fewer children. These trends will
fuel demand for products that are portable and/or easy to
prepare as an increasing number of consumers grab breakfast on the way to work or school.

188

Part II Assessing the external marketing situation

Consumer awareness of health and nutrition has also
played a major part in shaping the industry in recent
years. Cereal manufacturers began to tout the benefits
of eating breakfast cereal right on the package – vitaminfortified, low in fat and a good source of fibre. Another
trend, begun in the 1990s and picking up steam in the
2000s, is adding dehydrated whole fruits to cereal, which
provides colour, flavour and nutritional value. Yet touting
health benefits to adults and marketing film characters
to children have not been sufficient to reinvigorate this
mature industry.
Under the difficult market conditions, cereal packaging is
receiving new attention. Packaging was a secondary consideration, other than throwing in special offers to tempt kids.
These days, with meal occasions boiled down to their bare
essentials, packaging and delivery have emerged as key
weapons in the cereal marketer’s arsenal. New ideas circulating in the industry usually include doing away with the
traditional cereal box, which has undergone little change in
its lifetime. Alternatives range from clear plastic containers
to a return of the small variety six-packs.

Trends in distribution
The ways in which breakfast products are brought to market
in the developed world are not expected to change a great
deal. The distribution of breakfast foods is already characterized by a high percentage of sales through supermarkets/
hypermarkets, for reasons of convenience and economy.
However, supermarkets/hypermarkets will face more inte­
nse competition from hard discounters such as Aldi and
Lidl, which have been increasing their penetration, notably
in Europe. Hard discounters appeal to price-conscious
consumers, and continued economic uncertainty in key
markets such as France and Germany has fuelled growth in
this segment.
Discounters are also widening their reach in emerging
market regions, such as eastern Europe, where price sensitivity is high, and are stepping up their private-label development with premium breakfast products that compete
effectively with established brands. As a result of the fierce
comp­etition between supermarkets/hypermarkets and
hard discounters, independent food stores are likely to
lose out further in the future, as they will find it increasingly
difficult to compete in times of tighter margins and heavy
promotion.
In an increasingly time-poor, cash-rich culture, con­sumers
are also proving ever more willing to frequent convenience or impulse stores for the purchase of ‘on-the-go’
breakfast solutions such as cereals in pots complete with
milk, in-cup porridge, cereal bars and artisanal rolls and
pastries. Successful formats include outlets such as service
station forecourts and urban supermarket formats, which
are well placed to allow consumers to pop in on their way

to work, college or school. This trend is expected to become
more pronounced in the future, as people have less time to
eat at home.
While e-commerce is not generally suited to breakfast
products, due to their fresh and perishable nature, manufacturers will likely make greater use of their websites to
inform consumers about nutritional issues and new products, as well as to suggest recipes or generally increase
brand visibility. In developing markets, the growing use
of the internet will serve to make consumers increasingly
aware of western brands.
Independent food stores (where breakfast cereals are
traditionally sold) have suffered a decline during the past
years. They have been at a competitive disadvantage
compared with their larger and better resourced chained
competitors.

Trends in advertising
Advertising expenditures of most cereal companies were
down in recent years due to decreases in consumer
spending. However, there are still a lot of marketing activities going on.
Celebrity endorsements continue to play a critical part of,
for example, General Mills’s marketing strategies, in particular its association with sporting personalities dating back
to the 1930s with baseball sponsorship. One of the main
lines of celebrity endorsement involves Wheaties boxes,
which have featured a long line of sports people since the
1930s. In 2001, Tiger Woods, spokesman for the Wheaties
brand, appeared on special-edition packaging for Wheaties
to commemorate his victory of four Grand Slam golf titles.

Private-label competition intensifies
Across many categories, rising costs have led to price
increases in branded products which have not been
matched by any pricing actions taken by private labels. As
a result, the price gaps between branded and private-label
products have increased dramatically and, in some cases,
can be as much as 30 per cent.
This creates intense competitive environments for
branded products, particularly in categories such as cereals,
e.g. for Kellogg’s and CPW, as consumers have started to
focus more on price than on brand identity. This shift in
focus is partly the result of private labels’ increased quality
as they compete for consumer loyalty and confidence in
their label products.

Competitors
The competitive situation in three main markets (Germany,
UK and US) is shown in Table 3.

part iI CASE STUDY

189

Table 3 The world market for breakfast cereals, by company – 2010. Figures are percentage market share
Manufacturer

Germany

UK

US

World

Kellogg Company

27

30

30

30

CPW (General Mills + Nestlé)

12

15

30

20

PepsiCo (Quaker)

–

6

14

10

Weetabix

–

10

–

5

Private label

35

15

10

15

Others

26

24

16

20

100

100

100

100

Total

In the US General Mills and Nestlé market each of their breakfast cereal products independently, because CPW only covers international markets outside
the US. The CPW global market share (30 per cent) includes General Mills’ global market share, which alone is around 10 per cent, because of its strong
position in the US.

Kellogg’s
The company that makes breakfast foods and snacks for
millions began with only 25 employees in Battle Creek in
1906. Today, Kellogg Company employs more than 25,000
people, manufactures in 17 countries and sells its products
in more than 180 countries.
Kellogg was the first American company to enter the
foreign market for ready-to-eat breakfast cereals. Company
founder Will Keith (W.K.) Kellogg was an early believer in
the potential of international growth and began establishing Kellogg’s as a global brand with the introduction of
Kellogg’s Corn Flakes in Canada in 1914. As success followed
and demand grew, Kellogg Company continued to build
manufacturing facilities around the world, including Sydney,
Australia (1924), Manchester, England (1938), Queretaro,
Mexico (1951), Takasaki, Japan (1963), Mumbai, India (1994)
and Toluca, Mexico (2004).
Kellogg Company is the leader among global breakfast
cereal manufacturers, with sales revenue in 2011 of US$13.2
billion (operating profit was $2 billion). Wal-Mart Stores,
Inc. and its affiliates accounted for approximately 18 per
cent of consolidated net sales during 2011.
Kellogg Company was the world’s market leader in
ready-to-eat cereals throughout most of the twentieth
century. In 2005, Kellogg had 30 per cent of the world
market share for breakfast cereals (see Table 3). Canada,
the UK and Australia represented Kellogg’s three largest
overseas markets.
The most well-known Kellogg products are Corn Flakes,
Kellogg’s Special K, Frosted Mini-Wheats, Corn Pops and
Fruit Loops.

PepsiCo
In August 2001, PepsiCo merged with Quaker Foods,
thereby expanding its existing portfolio. Quaker’s family of
brands includes Quaker Oatmeal, Cap’n Crunch and Life

cereals, Rice-A-Roni and Near East side dishes, and Aunt
Jemima pancake mixes and syrups.
Quaker Foods’ first puffed product, Puffed Rice, was
introduced in 1905. In 1992, Quaker Oats held an 8.9 per
cent share of the ready-to-eat cereal market, and its principal product was Cap’n Crunch. Within the smaller hot
cereal segment, however, the company held approximately
60 per cent of the market. In addition to cereal products,
Quaker Oats produced Aunt Jemima Pancake mix and Gatorade sports drinks.
The PepsiCo brands in the breakfast cereal sector include
Cap’n Crunch, Puffed Wheat, Crunchy Bran, Frosted Mini
Wheats and Quaker. Despite recent moves to extend its
presence into new markets, PepsiCo tends to focus on its
North American operations.

Weetabix
Weetabix is a British manufacturer, with a relatively high
market share (10 per cent) in the UK. It sells its cereals
in over 80 countries and has a product line that includes
Weetabix, Weetos and Alpen. Weetabix is headquartered in
Northamptonshire, UK. In 2011 Weetabix had an estimated
turnover of around US$1 billion.
In May 2012 China’s state-owned Bright Food took over
Weetabix. Bright Food has extensive experience across all
aspects of the food industry, including the primary (agriculture/farming), secondary (manufacturing of food products)
and tertiary (retail and distribution) industries. In addition, it
owns several well-known trademarks and branded products
in Asia’s food processing industry.
Bright Food will also offer a good ‘route-to-market’
through its broad retail platform. In 2011, Bright Food
generated revenues of US$12.2 billion and had a net profit
of US$1.2 billion. Bright Food now sees a big opportunity
for Weetabix in China, where breakfast is a very important
meal and there is a trend towards healthy eating.

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Part II Assessing the external marketing situation

QUESTIONS
Carol has heard that you are the new global marketing
specialist, so you are called in as a last-minute consultant
before the presentation to the board of directors. You are
confronted with the following questions, which you are
supposed to answer as best you can:
1 How can General Mills and Nestlé create international
competitiveness by joining forces in CPW?
2 Evaluate the international competitiveness of CPW
compared to the Kellogg Company.

Why is competitor analysis essential in today’s turbulent business environment?
What are the major steps in conducting a competitor analysis?
How does an industry’s structure affect the intensity of competition?
What are the major sources of competitor intelligence?
How would you design a CI system?
How far is it possible to predict a competitor’s response to marketing actions?

Learning objectives
After studying this chapter you should be able to:
discuss the reasons and motives why firms go into relationships
describe and understand the concept of the ‘value net’ model
● explain and discuss how relationships with suppliers and customers can add
value in the total vertical chain
● describe the phases in the development of a relationship
● show and explain which factors determine a possible termination of inter-firm
relationships
●
●

CHAPTER 6 Analysing relationships in the value chain

193

explain and discuss how horizontal relationships with competitors and
complementors can add value to the customers
● explain the difference between B2C and B2B relationships
● explore how internal marketing relationships can add value to the relationships
with customers
●

6.1

Introduction
It is impossible to make sense of what happens in a firm or how to manage it without taking a
relationship view of a company. This means that it is not enough to discuss the activities that a
single firm performs. We need to understand how these activities are linked to the activities of the
company’s suppliers, its customers and indeed to its competitors. Because a firm’s activities evolve
within its relationships with others – each may have to do things that they do not really like, or
they may be unable to do the things that they want. Hence, companies are dependent for their
success on their relationships with customers and suppliers, and with others. Many of the strategic choices that a company makes will be in response to the actions of these other companies.
In turn, the outcome of a firm’s strategy will always depend on the actions of others, and
how they react to what the company does. In this way a firm’s strategy may be thought of as a
kind of game, because there is nothing predetermined about the consequences of the various
choices a firm might take. In a market where relationships matter, these games of action and
reaction are complex and their results are vital to the firms involved.
Relationships enable firms to develop competitive advantage by leveraging the skills and
capabilities of their partners to improve the performance of the total value chain. Firms no
longer compete as individual companies; they compete as groups of companies that cooperate
to bring value to the ultimate consumer. Across virtually all sectors of the economy, relationships have reshaped the interactions of companies.
In his classic ‘From 4Ps to 30Rs’ work, Gummesson (1994, 1999) identified 30 types of
relationship. The relationships are divided into four levels:
1 Classic market relationships (R1–R3) are the supplier–customer dyad, the triad of supplier–

Nano-relationships
Relations between internal
customers, internal
markets, divisions and
business areas within
organisations.
Micro-environment
A company, its customers
and the other economic
actors that directly and
regularly influence its
marketing practices.

customer–competitor and the physical distribution network, which are treated extensively
in general marketing theory.
2 Special market relationships (R4–R17) represent certain aspects of the classic relationships,
such as the interaction in the service encounter or the customer as member of a loyalty
programme.
3 Mega relationships (R18–R23) exist above the market relationships. They provide a platform for market relationships and concern the economy and society in general. Among
these are mega marketing (lobbying, public opinion and political power), mega alliances
(such as the NAFTA, setting a new stage for marketing in North America) and social relationships (such as friendship and ethnic bonds).
4 Nano-relationships (R24–R30) are found below the market relationships – that is, relationships inside an organisation (intra-organisational relationships). All internal activities
influence the externally bound relationships.
Compared to this comprehensive approach to RM, the following analysis of relationships
(the value net) is focused mainly on the four closest players in the micro-environment, plus
relationships to internal employees. (These are the classic market relationships and the nanorelationships in the Gummesson terminology.)
The basis for this chapter is the value chain Figure 6.1.

Value chain analysis implies a linear process, ignoring inputs from outside the chain –
many firms may input into the process at various stages (Lorenzoni and Ferriani, 2008; Neves,
2007). The reality is, therefore, that the value chain becomes a value network, a group of interrelated entities, which contributes to the overall creation of value through a series of complex
relationships, and the result is the so-called value net (see section 6.2).

EXHIBIT 6.1
Value chain of Braun (Oral-B) electric toothbrush
Oral-B is the number three oral care brand in the world.
Within oral hygiene, the Oral-B strategy has always focused on the strongly established ‘partnership’ between the
company and the dental profession. The brand highlights the fact that the products are developed using ‘Clinical
research conducted by leading dental professionals’.
Oral-B was originally comprised of manual toothbrushes only, but it now also encompasses a range of complementary offerings, including electrical power products, electrical toothbrushes, floss and oral care products and toothpaste
and mouth rinses. Gillette has further segmented sales with products for adults and a ‘Stages’ product line to meet
the changing and developing needs of a growing child. Its premium positioning of the Oral-B brand was enhanced by the
development of the Advantage and Advantage Control Grip toothbrushes, and latterly the Cross Action brush in 1998.
The Oral-B brand has also experienced a relatively high level of new product development. This has included the
launch of increasingly sophisticated and expensive toothbrushes, such as the Cross Action and Advantage.
Figure 6.2 illustrates the supply chain network, using Braun Oral-B as an example.
The company has also focused on the children’s market, with Gillette developing the Oral-B Stages line, which is designed
for the four major phases of a child’s development: infancy, pre-school, early school and pre-teen. A variety of toothpastes
have been extended with sensitive, and tooth and gum care, and children’s variants, and in 2004 the company acquired
Zooth – a manufacturer of manual and power toothbrushes for children – thus further expanding its presence in this sector.

Gillette extends power toothbrush portfolio
The year 2001 marked the entry of Gillette into power portable toothbrushes. In 2003 the new Oral-B Cross
Action Power battery toothbrush was claimed to be the most technologically advanced battery toothbrush

CHAPTER 6 Analysing relationships in the value chain

Suppliers
Second tier

Customers
First tier

Oil/refiner
chemicals/
plastic moulder

Plastic parts

Nylon products/
DuPont

Brush head

First tier
Focal firm:
Braun (Gillette)
Oral-B

Electrical
retail chains:
Dixons,
Curry’s,
Comet

Sales and
services

Support functions: Technology development
Procurement (buying)

Electric motor

End-consumers

Production Marketing

Second tier

Mass
merchandisers:
Marks & Spencer,
Sainsbury,
Tesco, B&Q etc.

Support functions: Firm infrastructure
Human resource management
R&D

Aluminium
products

‘Internal’ value chain

Chemicals/
producer of
NiCd batteries

Rechargeable
battery pack

Rubber/metal
/wire producers

Wires/plugs/
timer/chip/
printed circuit

B2B

195

Independent
electrical
stores

Electrical
wholesaler

Internet:
Amazon.com,
Dentist.net,
etc.

B2B

B2B

B2B

Upstream

B2C
Downstream

Figure 6.2 Illustration of the supply chain network, using Braun Oral-B as an example
available, combining CrissCross bristle technology (from manual products) with Oral-B’s rotating Power
Head.
In April 2004, Gillette extended its power toothbrushes range with the launch of the Oral-B Professional Care 8000
and the Oral-B Sonic Complete. Both products are rechargeable and the latter represents the company’s entry into
the sonic category. Gillette has further extended its range of power toothbrushes in 2005 with the launch of the Oral-B
Professional Care 9000 in June 2005.
Braun is now a wholly owned subsidiary of Procter & Gamble, which acquired Gillette in 2005. Since then the
Oral-B product range has been extended with further product variants. For example, in 2014 Procter & Gamble
developed the world’s first smartphone-connected toothbrush, to be sold under the Oral-B brand. The Bluetooth
function connects to a smartphone app, programmed with a dentist’s advice to help people improve their brushing
technique.

Downstream activities of the supply chain
The retail distribution of domestic electrical appliances, such as power toothbrushes, continued to be characterised by
trends away from traditional formats (such as independent specialists and department stores) towards modern, largeformat outlets such as hypermarkets, specialist electrical chains, DIY sheds and mass merchandisers.
Multiples increased their domination of retailing in developed markets. Major retailers pursued intensive expansion strategies, while consumer trends continued in the direction of one-stop shopping in the kind of large-scale
outlets favoured by the major multiples. Moreover, major multiples’ aggressive discounting policies, underpinned by
significant economies of scale, have appealed to increasingly price-sensitive consumers in major markets experiencing
economic difficulties, including the USA, Germany and Japan.
Internet distribution (e-commerce) is still in its infancy regarding sales of domestic electrical appliances. Although
sales are still relatively low, the Internet is critical to the domestic electrical appliances market as a marketing tool in
countries where penetration of the Internet is high.
Source: Adapted from different sources, among others Oral-B (www.oralb.com).

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Part II Assessing the external marketing situation

6.2

The value net
The value net shows how the firm can create value together with other partners in the vertical
and horizontal network Figure 6.3. Since the firm has relationships with different types
of interdependence, with different objectives for the development of the relationship, it is
important, organisationally, to differentiate between these relationships and how they are
handled.
Suppose we regard the environment of the individual relationship as consisting of other
relationships? Suppose, further, that the relationships are connected, directly or indirectly, to
each other? Then we can envision the market as a network. Following a sociological definition, networks are sets of interconnected exchange relationships between actors. Exchange
in one relationship is conditioned by exchange in other relationships. Instead of the concept
‘markets-as-networks’, ‘industrial networks’ and ‘business networks’ are used, signifying a
somewhat different emphasis of the analyses. A relationship between two actors is ‘embedded’
in a network.
In particular, the relationships and interactions are typically established with the following
actors (see Figure 6.3):
●
●
●
●
●

Exhibit 6.2 shows Braun’s (Oral-B) value net – especially its horizontal relationships.
The value net reveals two fundamental symmetries. Vertically, customers and
suppliers are equal partners in creating value. Figure 6.2 shows the Oral-B example of the
possible vertical network. The other symmetry is on the horizontal for competitors and
complementors. The mirror image of competitors is complementors. A complement to one

EXHIBIT 6.2
Value net of Braun (Oral-B) electric toothbrush
The value net of Braun (Oral-B) – the horizontal part – could look like Figure 6.4. The assumption here is that Braun
Oral-B’s product range consists only of electrical toothbrushes (that is, however, not quite true!) and that they can create
further value by cooperating with complementors (such as a manufacturer of manual toothbrushes – Jordan – and a
manufacturer of a complementary product – toothpaste – Colgate). Furthermore, Oral-B could also go into a technological cooperation with a company such as Philips. Such a cooperation could, for example, end up with a new technological platform, from which both Braun and Philips could develop new products based on the same basic technology.

Vertical cooperation
Suppliers
(Upstream)

Horizontal cooperation
Competitors: Oral-B
Possible cooperation with
Philips Sonicare about
developing new groundbreaking technologies in
electrical toothbrushing, e.g.
new basic software that could
also be used by other brand
manufacturers of electrical
toothbrushes. In this way
Braun (Oral-B) could share
the huge software
development costs with
another important player in
the industry.

Focal firm:
Braun (Gillette)
Oral-B electrical
toothbrush

Complementors: Oral-B
Possible cooperation
concerning expanding the total
oral care product programme
by complementing products,
e.g. by cooperation with Jordan
(Norwegian producer of
manual toothbrushes) or with
a toothpaste or dental sticks
company. By offering a
broader product programme
in oral care Braun (Oral-B) can
be a stronger player against
the big retail chains.

product or service is any other product or service that makes the first one more attractive –
for example, computer hardware and software, hot dogs and mustard, catalogues and
overnight delivery service, red wine and dry cleaners. The value net helps you understand
your competitors and complementors ‘outside in’. Who are the players and what are their
roles and the interdependences between them? Re-examine the conventional wisdom
of ‘Who are your friends and who are your enemies?’ The suggestion is to know your
business inside out and create a value net with the other players. Increase demand for
whatever your customer sells.
The relationships in the value net are further discussed in the following sections.

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Part II Assessing the external marketing situation

6.3

Relationships with customers
In the relationship approach, a specific transaction between the focal company and a customer
is not an isolated event but takes place within an exchange relationship characterised by
mutual dependency and interaction over time between the two parties. An analysis could stop
at the individual relationship. However, in the network approach such relationships are seen
as interconnected. Thus, the various actors in a market are connected to each other, directly
or indirectly. A specific market can then be described and analysed as one or more networks.
An exchange relationship implies that there is an individual specific dependency between
the seller and the customer. The relationship develops through interaction over time and
signifies a mutual orientation of the two parties towards each other. In the interaction the
buyer is equally as active as the seller. The interaction consists of social, business and information exchange and an adaptation of products, processes and routines to better reach the
economic objectives of the parties involved.
The simplest reason why firms seek to develop ongoing relationships with their customers
is that it is generally much more profitable to retain existing customers than continually seek
to recruit new customers to replace lost ones. There have been many exercises to calculate the
effects on a company’s profits of even a modest improvement in the rate at which customers
defect to competitors.
RM signifies that the firm should seek to have close relationships with its customers. Please
note that in this section, customers may cover both end-buyers and distributors/resellers.
What is meant by a relationship, and how is it developed? As illustrated by the following
quote, in essence this new approach means a focus on long-term interactions between a
marketer and its customers, instead of a short-term transactional approach:
Relationship marketing is the process of identifying and establishing, maintaining, enhancing,
and when necessary terminating relationships with customers and other stakeholders.
(Grönroos, 1996: 7)

In the development of relationships, managers have to realise that the customer is no longer
interested in buying a product. The product, in fact, is no more than an artefact around which
customers have experiences. What’s more, customers are not prepared to accept experiences
fabricated by companies. Increasingly, they want to shape those experiences themselves –
both individually and with experts or other customers.
Prahalad and Ramaswamy (2000) distinguish between personalisation and customisation:
●

●

Customisation: this assumes that the manufacturer will design a product to suit a customer’s needs. It is particularly pronounced on the Internet, where consumers can customise a
host of products and services such as business cards, computers and greeting cards.
Personalisation (co-creation): this, on the other hand, is about the customer becoming a
co-creator of the content of experiences. To provide personalised experiences, companies
must create opportunities for customers to experiment with and then decide the level of
involvement they want in creating a given experience with the company. Since the level
of customer engagement cannot be predetermined, companies have to give consumers as
much choice and flexibility as possible, both in the channels of distribution and communication and in the design of products. But companies can also help direct their customers’
requirements and expectations by guiding public debate about the future technology and
its impact on new products on the market (Morgado, 2008; Prahalad and Ramaswamy,
2004; Ramaswamy, 2008).

However, managing the variety of customer experiences is not the same as managing variety
in products. It is about managing the interface between a company and its customers – the

CHAPTER 6 Analysing relationships in the value chain

199

range of experience transcends the company’s products (Sterling, 2008). Managers must develop
a product that shapes itself to users’ needs, not the other way around. But as noted, customers
evolve over time through their experience with a product. The product has to evolve in a way that
enables future modifications and extensions based both on a customer’s changing needs and on
the company’s changing capabilities.

Developing buyer–seller relationships – the marriage metaphor
Over the past 15 years the analogy between building business relationships and personal
relationships (marriage) has been utilised extensively (Schurr, 2007). Certainly there are
some interesting parallels between them, and by considering the personal aspects of relation­
ship development it is possible to arrive at a better understanding of the business issues.
Sometimes human relationships and business relationships are quite ‘blurring’. Figure 6.5
illustrates that the business relationship can develop from acquaintances.
A theoretical life cycle model of relationships proposed by Dwyer et al. (1987) identified
five stages of relationship development – awareness, exploration, expansion, commitment and
dissolution (see Figure 6.6).
The linking stages seem to be:
●
●
●
●
●

party. The exploration stage includes attempts by each party to bargain and to understand the
nature of the power, norms and expectations held by the other. If this stage is satisfactorily
concluded, an expansion phase follows. Exchange outcomes in the exploratory stage provide
evidence as to the suitability of long-term exchange relationships. The commitment phase of
a relationship implies some degree of exclusivity between the parties and results in the information search for alternatives – if it occurs at all – being much reduced. The dissolution stage
marks the point where buyer and seller recognise that they would be better able to achieve
their respective aims outside the relationship.

Buyer–seller relationships in a cross-cultural perspective
International strategic alliances are being used with increasing frequency in order to keep up
with rapidly changing technologies, gain access to specific foreign markets and distribution
channels and create new products. Strategic alliances are becoming an essential feature of
companies’ overall organisational structure, and competitive advantage depends not only on
the firm’s internal capabilities, but also on its types of alliances with other companies.
Formation of international strategic alliances brings together managers from different
organisations and different national origins, with differences in the partners’ cultural bases.
Nationality is the key personal attribute that shapes the interaction among managers.
Managers with similar attributes, values and perceptions would be more likely to have strong
ties with each other than managers with dissimilar attributes, values and perceptions. Thus, a
shared nationality is a basis for managers to establish and maintain strong network ties.
Capitalising on an effective understanding of this culture can be used by the seller to achieve
a competitive advantage in developing and maintaining long-term buyer–seller relationships.
The age of the person in the buyer’s organisation with whom the seller interacts can play a
major role in establishing relationships. The age factor has cultural consequences of its own.
The older the buyer, the more his or her experience is integrated into the decision process.
Thus, it is interesting that companies that do business in an international context can
handle the cultural complexity and heterogeneity. Good handling of cultural heterogeneity
implies that the company can cope well in different cultural environments.

CHAPTER 6 Analysing relationships in the value chain

201

The success and the possibility of building both national and international cooperative relations depend on the interaction of the persons who want to establish the relation (Axelsson
and Agndal, 2000; Mascarenhas and Koza, 2008).

Distance reduction in international strategic alliances
The formation of collaborative alliances among organisations is touted as a significant strategy
that organisations can use to cope with the turbulence and complexity of their environments.
An international strategic alliance is commonly defined as:

Relatively enduring inter-firm cooperative agreements, involving cross-border flows and
linkages that utilise resources and/or governance structures from autonomous organisations
in two or more countries, for the joint accomplishment of individual goals linked to the
corporate mission of each sponsoring firm.
(Parkhe, 1991: 581)

The inter-firm distance is the degree to which the cultural norms, etc., in one country are
different from those in another country. Inter-firm distance creates difficulties for managers
when they adapt to the different cultures. Thus, greater cultural distance may lead to misunderstandings, friction and conflict between managers. The distance is also often referred to
as the â&#x20AC;&#x2DC;psychic distanceâ&#x20AC;&#x2122; (Brewer, 2007). For international companies trying to use strategic
alliances as a competitive weapon, it is crucial to identify the factors that reduce the distance
between the partners. Figure 6.7 shows the possible factors that are believed to influence the
distance reduction.
The dyadic relationship does not appear as an isolated entity, but as part of a larger
context. Any company has to maintain relationships with several other players, and some
other relationships occur in the development of a certain relationship. Each relationship
then appears to be embedded in or connected to some other relationships, and its development and functions cannot be properly understood if these connections are disregarded
(Segil, 2005).

Political and
economic
National
environment Communication culture

Technological
adaptation

Business
success

Organisational
culture

Strategy

Expectations

Seller

Buyer

Trust and
commitment

Inter-firm distance
Power

Conflicts

Social
interaction

Empathy

Management
style

Experience

Figure 6.7â&#x20AC;&#x201A; Factors influencing the inter-firm distance
Source: Preliminary work by Anna Marie Dyhr Ulrich, PhD Researcher at the University of Southern Denmark.

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Part II Assessing the external marketing situation

The interaction approach model takes four basic elements into consideration when
assessing the importance and influence of interaction:
1 the interaction process, which expresses the exchanges between the two organisations along

with their progress and evolution throughout time;

2 the participants in the interaction process, meaning the characteristics of the supplier and

the customer involved in the interaction process;

3 the environment within which the interaction takes place;
4 the atmosphere affecting and being affected by the interaction.

The manipulation and control of these variables is of particular importance in international business and is a resource-intensive and time-consuming process. The interaction approach places
the emphasis on processes and relationships; buyers and sellers are seen as active participants
in long-term relationships that involve complex patterns of interaction (Bee and Kahle, 2006).
Since this section tries to explain the distance reduction by focusing on the atmosphere
that has developed, it seems relevant to define the concept of ‘atmosphere’. The concept of
atmosphere is here defined as:
The emotional setting in which business is conducted. It constitutes the working environment
for the individuals in their interaction with each other. (Hallén and Sandström, 1991: 113)

As a result of research on interaction processes, five atmosphere criteria are suggested. These
are cooperation/conflict, power/dependence, trustworthiness/commitment, expectations
and closeness/distance (Håkansson, 1982).
While focus in this section is on distance reduction, the following discusses distance in detail.

Psychic distance/closeness
Psychic distance
Refers to the perceived
degree of similarity or
difference between the
business partners in
two different markets.
Psychic distance is
operationalised in terms
of both cultural and
business distance.

Psychic distance is used here to denote the degree of familiarity with regard to mainly cultural,

but also social, aspects.
Researchers of psychic distance are not very precise about the exact concept. These are factors
that may hinder and hamper the information flow between a company and its market, such as
differences in language, culture, political systems, level of education and level of development.
A problem with the psychic distance concept is that it relates to individuals’ cognitive
understanding instead of the whole company’s behaviour. There is no objective goal but a
distance that exists in human thought, and the distance perceived depends on how the individual regards the world. The term ‘psychic’ refers to the individual perception.
In empirical studies, Hofstede (1983, 1992) introduced the concept of cultural distance as
a measure of the distance between nations. Cultural distance is a potentially powerful determinant of the way relationships can develop.
The cultural distance is often used as a synonym for the psychic inter-firm distance. International business literature shows little consensus regarding an exact definition of the concept
of distance. Here the perceived distance is considered as:
The distance between the home market and a foreign market resulting from the perception
and understanding of cultural, business, organisational and personal differences.

The inference is that distance is a consequence of a number of interrelated factors, of which
perception is a major determinant. Perception is an interpretation of data and is, therefore,
highly subjective in terms of an individual’s personal experience and value systems; as value
systems are largely a product of cultural background, it could be argued that culture has an
influence on perception.

CHAPTER 6 Analysing relationships in the value chain

203

Cultural influence on the perceived distance and the interaction of the
alliance partners
If perception is influenced by culture, and perception is used to interpret those factors that
constitute the distance, it is clear that culture has an influence on distance.
The concept of distance is multidimensional in connection with international buyer–seller
relationship-building. We suggest that the following cultural dimensions affect the distance:
●
●
●

different understanding of the national and industrial culture;
different understanding of the organisational culture;
different personal behaviour because of different mental programming.

The national culture is only one level in the cultural hierarchy that influences the parties’ behaviour
and perception. The national culture must be seen as the basic, arranging structure for how to
handle business activities. Throughout time, many researchers have defined the concept of culture.
In this section the perception of culture will be based on Hofstede’s definition. He defines culture as:
The collective programming of the mind which distinguishes the members of one category
of people from another. (Hofstede, 1994: 1)

Marriage metaphor
The process of reducing
the psychic distance +
increasing dependence
between buyer and seller
= shared values and
joint investments in the
relationship.

He has laid down five criteria, based on what the national cultural differences are thought to be.
The five criteria are: power distance, individualism versus collectivism, masculinity versus femininity, uncertainty avoidance, and long-term versus short term-orientation (Hofstede, 1994).
A relationship between two firms begins, grows and develops – or fails – in ways similar
to relationships between people. The development of a relationship has been mapped out in a
five-phase model: awareness, exploration, expansion, commitment and dissolution. The five
phases are shown in Figure 6.8.
Figure 6.8 shows the initial psychic distance (1) between a buyer and a seller (both from
different countries and cultures), and it is influenced by the psychological characteristics
of the buyer and the seller, the firm’s organisational culture and the national and industrial
culture to which the firm belongs. Figure 6.8 also shows that the initial psychic distance (1) at
the beginning of the relationship is reduced to physical distance (2) through the interaction
process of the two partners. However, relationships do not always last forever. The partners
may ‘move from each other’, and the psychic distance may increase to distance 3. If the problems in the relationship are not solved, it may result in a ‘divorce’.
Within such a framework one might easily characterise a marketing relationship as a
marriage between a seller and a buyer (the dissolution phase being a ‘divorce’). The use of the
marriage metaphor emphasises the complexity, as well as some affective determinants of the
quality, of the relationship. Dwyer et al. (1987) call the first phase in a relationship awareness,
which means that the partners recognise each other as potential partners. In other words, in
their model the decisions made about cooperating and choosing the partner are combined.
Both types of decision making can exist at the beginning of cooperation, but it is difficult to
state any definite chronological order between them.
In SMEs it is likely that the decision-making process is reactive, in the way that the SME
probably first realises the existence of a potential partner (maybe ‘love at first sight’) and then
decides to cooperate. The selection process may, however, be better if companies look for
three key criteria (Kanter, 1994):
1 Self-analysis: relationships get off to a good start when partners know themselves and their

industry, when they have assessed changing industry conditions and decided to seek an
alliance. It also helps if executives have experience in evaluating potential partners. They
will not be easily attracted by the first good-looking prospect that comes along.
2 Chemistry: to highlight the personal side of business relationships is not to deny the importance of sound financial and strategic analysis. But successful relations often depend on the

2 Interaction between the
parties occurs. A gradual
increase in dependence
reflects probing and testing.
Termination of this fragile
association is simple.
3 One party has made a
successful request for
adjustment. Both parties
are satisfied with some
customisation involved.
Additional benefits from
products, services or terms
are sought from the current
partner rather than from an
alternative partner.
4 Some means of sustaining the
relationship result in contracts,
shared ownership, social ties.
Inputs are significant and
consistent. Partners adapt
and resolve disputes internally.

5 Possible termination of the
relationship. It can make assets
dedicated to the relationship
obsolete.

‘Divorce’?

Figure 6.8 The five-phase relationship model

creation and maintenance of a comfortable personal relationship between senior executives.
This will include personal and social interests. Signs of managers’ interests, commitment and
respect are especially important in high-context countries. In China, as well as in Chinesedominated businesses throughout Asia, the top manager of the Western company should show
honour and respect to the potential partner’s decision by investing his or her personal time.
3 Compatibility: the courtship period tests compatibility on broad historical, philosophical
and strategic grounds: common experiences, values and principles and hopes for the future.
While analysts examine financial viability, managers can assess the less tangible aspects of
compatibility. What starts out as personal rapport, philosophical and strategic compatibility
and shared vision between two companies’ top executives must eventually be institutionalised
and made public (‘getting engaged’). Other stakeholders get involved, and the relationship

CHAPTER 6 Analysing relationships in the value chain

205

begins to become depersonalised. But success in the engagement phase of a new alliance still
depends on maintaining a careful balance between the personal and the institutional.

Dissolution phase
‘Divorce’ is the
termination of the
relationship. It can make
the assets dedicated to
the relationship obsolete.

In the exploration phase (see Figure 6.8), trial purchases may take place and the exchange
outcomes provide a test of the other’s ability and willingness to deliver satisfaction. In addition, electronic data interchange can be used to reduce the costly paperwork associated with
purchase orders, production schedule releases, invoices and so on.
At the end of the exploration phase it is time to ‘meet the family’. The relations between
a handful of leaders from the two firms must be supplemented with approval, formal or
informal, by other people in the firms and by stakeholders. Each partner has other outside
relationships that may need to approve the new relationship.
When a party (as is the case in the expansion phase) fulfils perceived exchange obligations
in an exemplary fashion, the party’s attractiveness to the other increases. Hence motivation
to maintain the relationship increases, especially because high-level outcomes reduce the
number of alternatives that an exchange partner might use as a replacement.
The romance or courtship quickly gives way to day-to-day reality as the partners begin to live
together (‘setting up house’). In the commitment phase the two partners can achieve a level of
satisfaction from the exchange process that actually precludes other primary exchange partners
(suppliers) that could provide similar benefits. The buyer has not ceased attending other alternative suppliers, but maintains awareness of alternatives without constant and frequent testing. In a
buyer–seller relationship with a high conflict potential (e.g. caused by two very different partners),
the partners tend to monitor the relationship more closely because each partner is afraid that its
interests are not fully taken into account. However, the relationship is able to sustain its structure
and remain an efficient mechanism for inter-firm transactions between buyer and seller, as long as
partners’ economic benefits exceed potential costs in managing the alliance (Wahyuni et al., 2007).
During the description of the relationship development, the possibility of a withdrawal has
been implicit. The dissolution phase may be caused by the following problems (Beloucif et
al., 2006; Pressey and Qiu, 2007):
●

●

●

●

●

Operational and cultural differences emerge after collaboration is under way. They often
come as a surprise to those who created the alliance. Differences in authority, reporting
and decision-making styles become noticeable at this stage.
People in other positions may not experience the same attraction as the chief executives.
The executives spend a lot of time together, both informally and formally. Other employees
have not been in touch with one another, however, and in some cases have to be pushed to
work with their overseas counterparts.
Employees at other levels in the organisation may be less visionary and cosmopolitan than
top managers and less experienced in working with people from different cultures. They
may lack knowledge of the strategic context in which the relationship makes sense and see
only the operational ways in which it does not.
People just one or two tiers from the top might oppose the relationship and fight to undermine it. This is especially true in organisations that have strong independent business units.
Termination of personal relationships, because managers leave their positions in the companies, is a potential danger to the partnership.

Firms have to be aware of these potential problems before they go into a relationship, because
only in that way can they take action to prevent the dissolution phase. By jointly analysing the
extent and importance of the attenuating factors, the partners will become more aware of the
reasons for continuing the relationship, in spite of the trouble they are already in. Moreover,
this awareness increases the parties’ willingness to engage in restorative actions, thus trying to
save the relationship from dissolution (Tähtinen and Vaaland, 2006).

Managerial implications
Managers may consider relationship termination as a strategic decision. Firms should evaluate
which relationships to initiate, which to develop, which to continue to invest in and also

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which to discontinue (Mittal et al., 2008). Once a firm has made the decision to discontinue or
terminate a relationship, it should be aware that there is a range of termination strategies that
may be employed. The firm could be looking for strategies that could be labelled ‘beautiful
exits’ (Alajoutsijärvi et al., 2000). A beautiful exit is achieved by a strategy that minimises
damage occurring to the disengager, the other party and the connected network.
In fact, there is a lot to learn from all types of personal relationships – not just marriage.
After all, business relationships are not impersonal; they depend entirely on the people who
represent the supplier and the customers. There are interesting parallels with the Chinese
concept of guanxi, which involves different levels of personal commitment and connections
(Pressey and Qiu, 2007).
The implications for business of the marriage metaphor are:
●
●
●
●
●

It is important to point out that not all personal relationships progress to a marriage, monogamous or polygamous, and it is equally appropriate that not all marketing partnerships have to,
or are even able to, develop beyond the friendship stage.

The nature of the customer and the behaviour spectrum

Always-a-share
customers
Customers who have
low switching costs
and do not value
long-term relationships
with suppliers, making
them more suited to
transaction marketing.
Lost-for-good customers
Customers who have
high switching costs
and long-term horizons,
making them suitable for
relationship marketing
(RM).
Exit barriers
The barriers to leaving an
industry, such as the cost
of closing down a plant.

The behaviours of buyers and sellers interact with fundamental characteristics of the exchange
environment to define the nature of their relationship. This section will use some basic
elements of each sphere to describe a continuum of trading relations.
Jackson (1985) suggests that business marketers should assess ‘the time horizon within
which a customer makes a commitment to a supplier and also the actual pattern the relationship follows over time’. Figure 6.9 highlights the typical characteristics of customers at
the end points of the account behaviour spectrum: always-a-share customers (transactional
exchange) and lost-for-good customers (collaborative exchange).
Always-a-share and lost-for-good represent different ends of a continuum of exchange situations. Sellers will retain customers by giving good service and responding to customer needs.
Differentiating the offering on dimensions that forge structural ties and create exit barriers will
tend to move the relationship towards the lost-for-good variety. For example, an always-a-share
supplier might move from a fill-in role to become a major supplier by meeting customer criteria
for becoming a preferred supplier. The standards for preferred supplier vary from firm to firm, but
often include quality programmes, employee safety and training efforts and delivery specifications.

The always-a-share customers
These customers can allocate their purchases to several vendors. A period of no purchases can
be followed by a period of high purchases.
The always-a-share customer purchases repeatedly from one or other product category,
displays less loyalty or commitment to a particular supplier and can easily switch part or all
of the purchases from one vendor to another. Because of low switching costs, these customers
may share their patronage over time with multiple vendors and adopt short-term commitments with suppliers.

The lost-for-good customers
Relationships cemented by switching costs are called lost-for-good relationships because the
prospects of a customer making a costly switch to a competitor followed by a costly return
to the first are remote – probably weaker than a cold-call prospect. It is not likely that the
customer would pay the switching costs again to return to the first firm.

Franchise
A contractual association
between a manufacturer,
wholesaler or service
organisation (a franchiser)
and independent
business people
(franchisees) who buy the
right to own and operate
one or more units in the
franchise system.

Customers are tied to a system. They face significant switching costs, which may include:
●
●
●
●
●

specific investments;
cancellation penalties;
set-up costs for a new supplier;
retraining;
finding and evaluating a new supplier.

The lost-for-good customer makes a series of purchases over time, and views the commitment
to a particular supplier as relatively permanent. Once won, this type of account is likely to
remain loyal to a particular supplier for a long time. If lost, however, it is often lost for good.
The behaviour of many customers in the business market is somewhere between a pure
transaction focus and a pure relationship focus. The particular position that a customer occupies depends on a host of factors: the characteristics of the product category, the customer’s
pattern of product usage and the actions taken by both the supplier and the customer.

Implications for relationship marketing strategies
Business marketers often have a portfolio of customers who span the whole customer behaviour spectrum. Some emphasise low price and a transaction perspective while others place a
premium on substantial service and desire a more collaborative relationship. Indeed, some
customers fall somewhat in the middle of the account spectrum and represent accounts that
might be effectively upgraded to a level that adds value to the relationship for both parties.
To develop responsive and profitable relationship marketing strategies, special attention must
be given to four areas: selecting accounts, developing account-specific product offerings,
implementing relationship strategies and evaluating relationship strategy outcomes.

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Part II Assessing the external marketing situation

A relationship with customers targeted on strong and lasting commitments is especially
appropriate for lost-for-good accounts. Business marketers can sensibly invest resources
in order to secure commitment and to aid customers with long-term planning. Given the
long-term nature and the considerable stakes involved, customers are concerned both
with marketers’ long-term capabilities and with their immediate performance. Because the
customers perceive significant risk, they demand competence and commitment from the
selling organisation.
If we transfer this to Figure 6.10, the upper figure (‘bow-tie’) illustrates the always-a-share
and the lower figure (‘diamond’) illustrates the lost-for-good. In the traditional ‘bow-tie’ relationship, the purchasing agent and the salesperson assume the primary roles in the exchange
process.
Relational exchanges, in contrast, have a structure similar to the ‘diamond’, where the
boundaries between the firms become more opaque. Interactive, cross-functional teams now
openly exchange ideas for improving efficiency and effectiveness (see Figure 6.10). The goal is
to create new value together (Jones et al., 2005; Philipsen et al., 2008).
Perhaps the most important prerequisite for the ‘diamond’ model is the need for a high
level of ‘connectivity’ between the firm and its strategic suppliers. This implies not just the
exchange of information on demand and inventory levels, but multiple, collaborative working
relationships across the organisations at all levels. It is increasingly common today for companies to create supplier development teams that are cross-functional and, as such, are intended
to communicate with the equivalent customer management team in the supplying organisation (Kothandaraman and Wilson, 2000).

Behavioural conditions in buyer–seller relationships
The key dimensions in the basic behavioural conditions for establishing and developing
buyer–seller relationships are as follows.

‘Bow-tie’ type
(appropriate for
always-a-share –
transaction focus)

R&D
Production
Marketing
Information
systems

Sales
person

Buyer

Supplier

Customer
R&D

‘Diamond’ type
(appropriate for
lost-for-good –
relationship focus)

Production
Customer
management
Marketing
Supplier

Figure 6.10 Organisation of buyer–seller relationship

Marketing
Operations
Business
development
Information
systems

Information
systems

Marketing

Operations
Business
development
Information
systems

Supplier
development

Customer

Chapter 6 AnAlYSInG RelATIOnShIPS In The VAlue ChAIn

209

Bonding/goal compatibility
Bonding is defined as the part of a business relationship that results in two parties (customer
and supplier) acting in a unified manner towards a desired goal.
Partners in the relationship must share mutually achievable goals, although the goals
do not have to be the same. It would be unrealistic to expect that partners would share the
same goals, as each probably has different parts of the value chain, such as to source product
exclusively from a certain key supplier. However, it is likely that both share the goal of better
meeting the needs of the end customer. Given the economics of the different levels of the
supply chain, one partner might focus on reducing the total cost of ownership, whereas the
other partner might look at accessing a new market segment as its major goal.

eXhibit 6.3
Speedo’s relations with its retailers
Speedo is a leading international brand company of professional swimwear, based in the uk. like many companies
today, Speedo has set up different, parallel structures for managing its diverse customer base.
Its current organisation comprises three distinct interface structures: first, a traditional sales organisation with a
large and dispersed field salesforce who deal with the small independent sports stores. They have traditionally been
the mainstay of the business and represented in the past the main channel of distribution. For Speedo, however, the
sports stores are low-volume customers that are spread all over the country and therefore best dealt with by individual
salespeople. The company’s concern for these relationships is manifested in the strong emphasis they place on an
experienced, well-qualified salesforce with a high level of employee retention.
The portion of the business accounted for by the second customer segment – major high-street retailers and sports
multiples – has gradually increased over the last few years to approximately 50 per cent, with the prospect of a further
rise to 80 per cent in the near future. The shifting balance and the concentration within this channel of distribution
leverage the relationship value, which in turn justifies the resource-intensive account structure Speedo maintains to
deal with these customers. The work between the dedicated account managers and their counterparts on the retailer
side is facilitated by the provision of back-up support from other functions within the company.

Source: Courtesy of Speedo (www.speedo.com).

Finally, in 1999, Speedo started an even closer cooperation with high-growth customer Sports Division – europe’s
biggest independent sports retailer with approximately 120 high-street stores, with additional in-store concessions, as
well as a number of superstores. For Speedo, the relationship is crucial because, aside from the high economic relationship

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Part II Assessing the external marketing situation

value, Sports Division shares its interest, stocking only leading brands and not own-label products. The initiative for the
project came from the operations director who is still in charge of the implementation and who assigned an account
development team to work exclusively on this one account. The team members have been selected to match the retailer’s supply management team and both teams’ target is to improve the effectiveness and efficiency of the supply chain.
Source: Adapted from Christopher and Jüttner (2000).

Trust
Trust is the belief that one’s alliance partner will act in a predictable manner, will keep his
or her word and will not behave in a way that negatively affects the other. This last point is
particularly salient under conditions where one partner might feel vulnerable due to a heightened dependence on the other.
In many alliances, partners are compelled to share information or knowledge that lies near,
if not at, the core of their business. Trust diminishes the concern that this knowledge might be
expropriated and used later to compete against the partner. This fear is very real among managers
of small companies that seek alliances with larger companies. These managers fear that the larger
firm is using the relationship to gain knowledge for its own benefit (Mendez et al., 2006).

Empathy
Empathy is the dimension of a business relationship that enables the two parties to see the
situation from the other’s perspective. It is defined as seeking to understand somebody else’s
desires and goals. It involves the ability of individual parties to view the situation from the
other party’s perspective in a truly cognitive sense. The empathy dimension plays a major role
in Chinese business relationships (the guanxi framework) and is also apparent in Western
business relationships (Buttery and Wong, 1999).

Reciprocity
Allowance
Promotional money paid
by manufacturers to
retailers in return for an
agreement to feature the
manufacturer’s products
in some way.

Reciprocity is the part of a business relationship that causes either party to provide favours or
make allowances for the other in return for similar favours or allowances to be received at a
later date. It covers the interdependence for mutual benefit and equality of exchanged values
between two individuals.
These behavioural factors emphasise the importance of personal social ties in business
relationships. Business relationships are built on friendships, and friendships are built upon a
variety of social interactions. The individual’s networks are also the enablers and driving forces
of many firms’ internationalisation. This is a phenomenon well known to marketing practitioners, but which has received little attention among academics (Axelsson and Agndal, 2000).

Relationships in B2B markets versus B2C markets
For many years RM was conceived as an approach for the inter-organisational B2B markets.
Recently, however, the domain of RM has been extended to incorporate innovative applications in mass consumer markets. Much has changed in a few years. Recent applications of RM
in consumer markets have been facilitated by developments in direct and database marketing
within an increasingly competitive and fragmented marketplace.
In Table 6.1 the major differences between B2B and B2C relationships are highlighted.

One-to-one marketing relationships
According to Peppers et al. (1999), one-to-one marketing means being willing and able to
change your behaviour towards an individual customer based on what the customer tells you
and what else you know about that customer.

CHAPTER 6 Analysing relationships in the value chain

211

Table 6.1 Comparison of B2C and B2B relationships
Characteristic

Business-to-consumer (B2C)

Business-to-business (B2B)

1 Relationship form

Membership. The individual acknowledges
some relationship (though informal
affiliation with the organisation).

Idiosyncratic investment
Specific investment in a
single relationship.

Telemarketing
Using the telephone as
the primary means of
communicating with
prospective customers.
Telemarketers often use
computers for order
taking.

One-to-one relationship marketing is often expressed as being synonymous with relationship marketing, but is treated here as an extension of the initial effort that results from the
ever-increasing personalisation of promotional efforts in a variety of industries.
The two obvious approaches are either segmentation or personalisation. Segmentation is
information distributed to narrow, well-defined bands of target customers – an approach used
for years. Conversely, personalisation is information distributed and designed to be one-toone. The historical methods for collecting data for either segmented or personalised databases
have been direct mail and telemarketing. One-to-one relationships can be enhanced today by
most firms using the Internet, which gives the opportunity of personally addressed marketing
communications. One-to-one marketing goes hand in hand with customisation. It is all about
generating feedback so that marketers can learn more about customers’ preferences, with
future offers being tailored to those preferences.

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Part II Assessing the external marketing situation

The intention of one-to-one marketing is to increase the value of a customer base by establishing a learning relationship with each customer. The customer tells you of some need, and
you customise your product or service to meet it. The theory behind one-to-one marketing is
simple, with implementation being another matter. Effectiveness will require differentiating
customers and interacting with them.
The emphasis on the customisation of products and services to meet the very specific needs
of individual customers is altering the manufacturing requirements of most firms. New technology has emerged that permits such emphasis on individualism in the final product. Mass
customisation is the term used to describe the ability of manufacturers to make almost instant
changes in the production process to individualise output in quantities as small as one. This
technology, coupled with the emphasis on relationships, has permitted the pursuit of relationship marketing on a one-to-one basis. Mass customisation will further drive relationship
marketing, with its associated demands for greater understanding of each customer within
the seller’s marketing umbrella. This additional emphasis will spur marketers to find new and
better ways of gaining customer information and keeping it current.

Bonding in buyer–seller relationships
The following is mainly developed for the service sector, but the bonds described are applicable to the majority of B2B relationships. Liljander and Strandvik (1995) define bonds as ‘exit
barriers that tie the customer to the service provider and maintain the relationship’.
The authors propose ten different types of bond between the customer and the seller: legal,
economic, technological, geographical, time, knowledge, social, cultural, ideological and
psychological bonds. The authors point out that the first five bonds can be managed by a
service firm, while the remaining five are difficult for a firm to measure and manage:
1 A legal bond is a contract between a customer and a service provider. The present study

views legal bonds as belonging to the legal factor group.

2 An economic bond refers to a situation in which price reductions are used as incentives

towards the customers. The economic bond belongs to the economic factor group.

3 A technological bond refers to a situation in which the customer is required to use repair/
4
5

6
7
8
9
10

maintenance facilities and/or original spare parts from a manufacturer. The technological
bond belongs in the technological factor group.
A geographical bond describes the limited possibility to buy a service because of distance.
The present study views the geographical bond as belonging to the contextual factor group.
A time bond illustrates the situation where a service provider may be used because of
suitable business hours. The present study categorises the time bond as belonging to the
procedural factor group.
A knowledge bond means that a customer gains knowledge about a service provider. The
knowledge bond belongs in the information factor group.
A social bond exists when a customer and a service provider know each other well. Social
bonds belong in the social factor group.
A cultural bond exists when a customer identifies with certain companies or products
made in certain countries. The cultural bond belongs in the contextual factor group.
An ideological bond indicates personal values – for example, a preference for ‘green’ or
environmentally sound products. The ideological bond is part of the social factor group.
A psychological bond refers to a customer being convinced of the superiority of a certain
service provider. The present study sees the psychological bond as belonging to the social
factor group.

Figure 6.11 presents one suggestion for the relationship of the concepts of bonds and
commitment over time. It illustrates the holistic view of bonds, i.e. that their combination
dictates the state of commitment and no bond operates in isolation from others. ‘Bond’ is
proposed as a term to be used for ties, and the resulting state would be called ‘commitment’ –

CHAPTER 6 Analysing relationships in the value chain

Financial
bond
Price-related
benefits

Service
encounters

Emotional
bond

Commitment

Commitment

Positive

Social
bond

Structural
bond

213

Service encounters
Negative

Time

Contact
Legal
bond

Figure 6.11 Development of bonds and commitment over time
Source: Adapted from Arantola, H. (2000) ‘Buying loyalty or building commitment: an empirical study of customer loyalty programmes’, Research Report, Swedish
School of Economics and Business Administration. Reproduced with permission.

that is, a combination of interrelated bonds that evolve in the bonding process in the course of
the relationship. Further, the state of commitment and the combination of bonds are perceived
in their own way by both parties in the relationship.
Commitment may be positive or negative. In semantic terms, the idea of a negative bond
may seem odd – how could a tie be measured on the minus scale? However, the concept helps
in assessing the negative situations when bonds act as exit barriers for a customer who wants
to exit. The customer perceives ties, and the situation is perceived as negative. This situation
is illustrated in Figure 6.11 with the legal bond, where the customer is bound by a legal agreement that prevents an exit. In Figure 6.11, the financial bond results in positive commitment
in the following ways: the customer perceives being tied to the supplier due to relationship
investment or special pricing, and perceives the relationship as beneficial and positive. Financial bonds are usually rather short term (as seen in Figure 6.11), but a service encounter may
immediately build a positive emotional bond, or it may take a couple of months for the first
bonus voucher to arrive and build a positive economic bond. When positive bonds develop,
elements of loyalty such as repeat experiences and positive attitude are also present.

The role of encounters in RM
Moments of truth
A critical or decisive time
on which much depends;
a crucial moment when
seller’s staff meets the
customer.

Encounters can be considered to be the period of time during which a customer directly
communicates with a specific product or service. We can see these encounters as moments
of truth. In this approach, an encounter is not limited to personal interaction, but includes
customer contact with physical facilities and other tangibles.
Communication is defined as the process of assigning meaning. Each perception we have
of our environment involves a transactional process between ourselves and the object(s) we
perceive. Each participant’s perception of the other in an encounter is a transaction between
the qualities of this other and the participant’s interpretation of these qualities. You form a
relationship with the other participant in a dyadic encounter when you become aware that
this other person is aware of you. Your participation in a specific encounter means that it will
have an effect on you, irrespective of whether you are primarily creating or deciphering the
message. In any transaction, each participant is simultaneously sending and receiving.

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Part II Assessing the external marketing situation

A person is aware that he or she is in a relationship when he or she is aware of being
perceived by the other party. A relationship is therefore formed during a specific encounter
when the following elements are present:
●
●
●
●

you and another are interacting;
you are aware of the other’s behaviour;
the other is aware of your behaviour;
as a result, you are aware that the other is aware, and the other is aware that you are aware.

A relationship is formed when two people are aware both of each other and of the other’s
awareness. But this is only the beginning of a potential relationship. The key to building a
relationship and sustaining communicative behaviour is in the way in which each participant
adjusts to the other.
The awareness of being perceived by the other party at the start of a relationship is
not limited to interpersonal encounters where customers have face-to-face contact with
employees, although the potential for creating relationships in such encounters is rather high.
The relationship might well be created and maintained during encounters with a mediated
human contact, e.g. via phone, fax, email or the Internet, or through encounters involving
no human contact, such as interaction with a company through an ATM. The complexity of
interaction decreases where there is no face-to-face human contact; responses are reduced
to verbal or written expressions in the mediated human encounter, while interaction during
an encounter with no human contact is limited to automatic predesigned response patterns
performed by or through mechanical and electronic equipment.
In Figure 6.12, encounters have been categorised using two factors: degree of human
interaction and intensity of the relationship bond. The latter describes the extent to which a

single encounter contributes to relationship bonding. Figure 6.12 distinguishes seven types of
encounter and positions them according to these two factors.

Internationalisation of encounter-based strategies
Companies that have been able to establish and maintain lasting relationships with
customers in their home markets might be interested in exploring the potential for transferring encounter-based relationship strategies to other markets. Although the ground rules
for establishing relationships might be the same all over the world, the prevailing (cultural)
conditions underpinning the formation and consolidation of relationships with customers
may be very different.
The management has to be aware of the considerably higher complexity of the environment
under consideration (compared to a purely domestic market) when a company takes and
implements decisions concerning the standardisation of encounters with the aim of establishing customer relationships in foreign cultures. A careful assessment of the opportunities
for encounter standardisation should provide an efficient and effective basis for establishing
and maintaining relationships with customers, provided the product and/or service on offer
is able to satisfy customer expectations.

6.4

Relationships with suppliers
There seem to be three major strategic issues related to purchasing management:
●
●
●

decision whether to make an item in-house or to buy from external suppliers;
development of appropriate relationships with suppliers;
management of the supplier base in terms of size and relations between suppliers.

The first strategic issue is to decide what items to procure. This is defined by the scope of the
operations that are undertaken in-house by the buying company. This determines the degree
of vertical integration, which in purchasing terms has been addressed as the make-or-buy
issue (Freytag and Mikkelsen, 2007; Ghauri et al., 2008; Mclvor, 2008).
What to produce internally and what to buy from external suppliers has been an issue in
manufacturing firms for a very long time, despite the fact that it was apparently not identified
as a matter of strategic importance until the 1980s. It is evident that buying firms, over time,
have come to rely more on ‘buy’ than ‘make’. Consequently, outsourcing to external suppliers
has increased dramatically over time (Preston, 2004; Soroor et al., 2009).
Having suppliers that compete with one another is one way of increasing efficiency in
the purchasing operations. A buying company can switch from one supplier to the other
and thus influence the vendors towards improving their efforts. The opportunity to playoff suppliers against each other in terms of price conditions has been a particularly recommended purchasing strategy. The idea of this strategy is to avoid becoming too integrated
with suppliers, because integration leads to dependence. Customer relationships based on this
logic are characterised by low involvement from both parties.
The tendency in the overall industrial system towards increasing specialisation has called
for more coordination between the individual companies. This in turn leads to more adaptation between buyer and seller in terms of activities and resources. These adaptations are
made because they improve efficiency and effectiveness. They also create interdependencies
between customer and supplier. Such relationships are characterised by a high involvement
approach.
High-involvement relationships typically provide different types of benefits than low
involvement ones, since it is not the individual transaction that is optimised. On the contrary,
customers are eager to improve long-term efficiency and effectiveness. Instead of focusing

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Part II Assessing the external marketing situation

on price in each transaction, the efforts are concentrated on affecting long-term total costs.
The purchasing behaviour of buying companies affects a number of costs, of which price is
sometimes only minor in comparison with other costs. For example, product development
has become increasingly common. Integrating resources with suppliers can reduce lead times
in product development and decrease the total R&D spending.
The widely recognised lean and agile supply practices in such relationships have demonstrated that buyers and suppliers can work together to improve supply relationship, or even
supply network, performance and consequently allow the supply chain to deliver better value
to the ultimate customer. Lean supply techniques aim to eliminate waste in all areas of the
business, from the shop floor to manufacturing processes, and from new product development to supply chain management. Agile supply techniques, on the other band, are directed
towards reducing the time it takes for a supply chain to deliver a good or service to the end
customer and are aimed at supply chains that have to respond to volatile demand patterns.
Both the ‘lean’ and ‘agile’ supply schools have provided a great deal of case evidence that
demonstrates that collaboration, in the cause of lean or agile goals, can be effective in bringing
down costs and/or increasing product functionality. For example, the lean school has often
referred to the Japanese automobile industry, especially the Toyota Motor Corporation, as a
good example of lean practice. The agile school has pointed to the production of the Smart
Car – a car that offers total customisation backed up by a service that offers responsiveness to
customer demands.
However, the idea that collaboration constitutes ‘best practice’ ignores two key
factors. First, not all transactions will justify the resources required for a collaborative
relationship. Entering a collaborative relationship will only make economic sense if the
expected financial and strategic rewards are deemed to be higher than the costs associated
with the establishment of such a relationship. Second, not all the buyers that suppliers
deal with will wish to allocate the resources required for a collaborative relationship to
be developed. A supplier may have both the resources and the inclination to develop a
collaborative relationship in a given situation. However, the buyer in question may have
other priorities. The supplier may prefer to allocate its resources to other customers –
those that it deems more relevant to the achievement of its business goals (Andersen and
Christensen, 2004).
Furthermore, even where collaborative relationships are developed, there is by no
means one form of collaboration. For example, in some power situations getting buyers
to collaborate will not be possible. In particular, such relationships will differ in both their
conduct and outcome depending on the power-dependence relations concerned. As has
long been argued in the social science literature, there are four generic buyer–supplier power
structures: buyer dominance, interdependence, independence and supplier dominance
(see Figure 6.13).
The bonding between buyers and suppliers can also increase by investing in relationshipspecific adaptations to processes, products or procedures (Hughes, 2008; Johnsen et al., 2008).
By relationship-specific adaptations, we mean those adaptations that are non-transferable to
relationships with other buyers or suppliers. It could be adaptations of the following kind:
adaptations of the product specification, adaptations to the product design, adaptations to
the manufacturing process, adaptations to delivery procedures, adaptations to stockholding,
adaptations to planning procedures, adaptations to administrative procedures and adaptations to financial procedures.
To understand the power relation, the power resources of both sides need to be put
together. When the buyer has high power resources and the supplier has low power resources,
the buyer will be dominant. When the buyer has low power resources and the supplier has
high power resources, the supplier will be dominant. When the power resources are high for
both the buyer and the supplier, then they will be interdependent. When both parties have
low power resources, then they will be independent from each other.
Figure 6.13 provides a description of some of the key attributes that one might expect to
find if one were trying to position buyer and supplier relationships using the power matrix.

CHAPTER 6 Analysing relationships in the value chain

BUYER DOMINANCE
Few buyers/many suppliers
Buyer has high % share of total market for supplier
Supplier is highly dependent on buyer for revenue
with limited alternatives
Supplier switching costs are high
Buyer switching costs are low
Buyer account is attractive to supplier
Supplier offerings are customised
Buyer search costs are low
Supplier has no information asymmetry advantages
over buyer

RELATIVE TO SUPPLIER

ATTRIBUTES OF BUYER POWER

HIGH

INDEPENDENCE

LOW

Few buyers/few suppliers
Buyer has relatively low % share of total market for
supplier
Supplier is not dependent on buyer for revenue
and has many alternatives
Supplier switching costs are low
Buyer switching costs are low
Buyer account is not particularly attractive to supplier
Supplier offerings are commoditised and standardised
Buyer search costs are relatively low
Supplier has only limited information asymmetry
advantages over buyer

LOW

217

INTERDEPENDENCE
Few buyers/few suppliers
Buyer has relatively high % share of total
market for supplier
Supplier is highly dependent on buyer for
revenue with few alternatives
Supplier switching costs are high
Buyer switching costs are high
Buyer account is attractive to supplier
Supplier offerings are not commoditised and
standardised
Buyer search costs are high
Supplier has significant information asymmetry
advantages over buyer

SUPPLIER DOMINANCE
Many buyers/few suppliers
Buyer has low % share of total market for supplier
Supplier is not at all dependent on the buyer for
revenue and has many alternatives
Supplier switching costs are low
Buyer switching costs are high
Buyers account is not attractive to the supplier
Supplier offerings are not customised
Buyer search costs are very high
Supplier has high information asymmetry
advantages over buyer

ATTRIBUTES OF SUPPLIER POWER
RELATIVE TO BUYER

HIGH

Figure 6.13â&#x20AC;&#x201A; The attributes of buyer and supplier power

The power matrix is explained in more detail elsewhere, but it is constructed around the idea
that all buyer and supplier relationships are predicted on the relative value and the relative
scarcity of the resources that are exchanged between the two parties.
In the buyer dominance box, the buyer has power attributes relative to the supplier that
provide the basis for the buyer to leverage the supplierâ&#x20AC;&#x2122;s performance on quality and/or cost
improvement, and to ensure that the supplier receives only normal returns.
In the interdependence box, both the buyer and the supplier possess resources that require
the two parties to the exchange to work closely together, since neither party to the exchange
can force the other to do what it does not wish to do. In this circumstance, the supplier may
achieve above-normal returns but must also pass some value to the buyer in the form of lessthan-ideal returns, as well as some degree of innovation.
In the independence box, neither the buyer nor the supplier has significant leverage
opportunities over the other party, and the buyer and the supplier must accept the current
prevailing price and quality levels. Fortunately for the buyer, this price and quality level is
often not that advantageous for the supplier because the supplier has few leverage opportunities (other than buyer ignorance and incompetence) and may be forced to operate at only
normal returns.
In the supplier dominance box, the supplier has all of the levers of power. It is in this box
that one would expect the supplier to possess many of the isolating mechanisms that close
markets to competitors and many of the barriers to market entry that allow above-normal
returns to be sustained. In such an environment, the buyer is likely to be both a price and
quality receiver.

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Part II Assessing the external marketing situation

As well as the possible buyer–supplier power structures to consider, there is huge potential in exploiting better the opportunities offered by coping with suppliers. However, potential benefits are not reaped automatically. The focus has shifted from buying well towards
managing within relationships (Gadde and Snehota, 2000).

Reverse marketing

Reverse marketing
The buyer (and not the
seller as in traditional
marketing) takes the
initiative of searching for
a supplier that is able to
fulfil the buyer’s needs.

6.5

Firms increasingly realise that rapidly changing market conditions require significant changes
in their purchasing function. In more and more firms, purchasing is becoming proactive
and of strategic importance. This phenomenon has been referred to as reverse marketing.
As the term implies, there are clear similarities with the marketing concept (Biemans and
Brand, 1995). The phenomenon was described in Chapter 4 (section 4.4), in the section about
the ‘Buy Grid model’, including the different stages of the organisational purchase decision
process (screening and selection of potential suppliers) in the B2B market.
Reverse marketing describes how purchasing actively identifies potential subcontractors
and offers suitable partners a proposal for long-term cooperation. Similar terms are proactive
procurement and buyer initiative (Ottesen, 1995). In recent years, the buyer–seller relationship has changed considerably. The traditional relationship, in which a seller takes the initiative by offering a product, is increasingly being replaced by one in which the buyer actively
searches for a supplier that is able to fulfil its needs.
Implementing a reverse marketing strategy starts with fundamental market research and
with an evaluation of reverse marketing options (i.e., possible suppliers). Before choosing
suppliers the firm may include both present and potential suppliers in the analysis as well as
current and desired activities.
Based on this analysis, the firm may select a number of suitable partners as suppliers and
rank them in order of preference.

Relationships with complementors/partners
This kind of relationship is based on collaboration between manufacturers of complementary functions and products/services. In such a collaboration, each partner has a strategic
resource that the other needs and in this way each partner is motivated to develop some kind
of exchange process.
For example, partners divide the value chain activities between themselves: one partner
develops and manufactures a product while letting the other partner market it. Another
example is a joint marketing agreement where complementary product lines of two firms are
sold together through existing or new distribution channels, and thus broaden the market
coverage of both firms.
In Figure 6.14, different types of coalition are shown in the value chain perspective. These
are based on the possible collaboration pattern along the value chain. In Figure 6.14 two partners are shown, A and B, each having its own value chain. Three different types of value chain
partnership appear:
●
●

●

upstream-based collaboration (1): A and B collaborate on R&D and/or production;
downstream-based collaboration (2): A and B collaborate on marketing, distribution, sales
and/or service;
upstream/downstream-based collaboration (3): A and B have different but complementary
competences at each end of the value chain.

In such collaboration, each partner has a strategic resource that the other needs and so they
are prepared to develop some form of extended exchange mechanism in order to expedite the
process. For example, it could involve the transfer of technology in exchange for knowledge

and understanding of a market. The resources involved are, by definition, strategic in nature.
They are the long-term, relatively stable bases upon which the organisations create value in
the product offerings that they exchange.
Types 1 and 2 represent the so-called ‘Y coalition’ and type 3 represents the so-called
‘X coalition’.

Y coalitions
Partners share the actual performance of one or more value chain activities. For example,
joint production of models or components enables the attainment of scale economies that
can provide lower production costs per unit. Another example is a joint marketing agreement,
where complementary product lines of two firms are sold together through existing or new
distribution channels, and thus broaden the market coverage of both firms.

EXHIBIT 6.4
Irn-Bru’s distributor alliance (Y coalition) with Pepsi Bottling Group (PBG) in Russia
A. G. Barr, the UK’s leading independent branded soft drinks manufacturer, was founded in Falkirk, Scotland, in 1875.
The company expanded to Glasgow in 1887 and its headquarters are now in Cumbernauld, just outside the city.
A. G. Barr makes the renowned Irn-Bru soft drink, introduced in 1901, which in 2008 had about 5 per cent of the UK
carbonated soft drinks (CSD) market. Despite tough domestic competition, Irn-Bru is Scotland’s largest-selling singleflavoured CSD and is the third best-selling soft drink in the UK, after Coca-Cola and Pepsi.
In 2008, A. G. Barr’s turnover was £170 million (Annual Report and Accounts 2009), with an operating profit of
£23.1 million. The formula for Irn-Bru is a closely guarded secret, known only by two of Barr’s board members. Irn-Bru
is most famous for its unique taste, maverick advertising and eccentric bright orange colour, making it easily recognisable even when not in its packaging.
In the late 1980s, Barr actively began to look at expansion through international markets. It considered France,
Germany and the Benelux countries, among others, but found that Coca-Cola and Pepsi dominated these mature
markets. Competition was fierce and margins tight. Consequently, it examined other emerging markets and was
attracted to Russia. In the years following the break-up of the Soviet Union, Russia showed much potential – with
a large population, growing prosperity and standard of living and a rising demand for consumer goods. Moreover,
the Russians, like the Scots, have a ‘sweet tooth’, leading to high soft-drinks consumption. As part of the international
expansion strategy, in 1994 Barr began direct exports of its trademark Irn-Bru to Russia.
Barr eventually parted company with its initial franchisee, but the Irn-Bru brand by that time was so wellestablished that, in 2002, Barr arranged a new manufacturing franchise contract with the Pepsi Bottling Group

220

Part II Assessing the external marketing situation

(PBG) of Russia to manufacture, distribute and sell Irn-Bru. PBG
(Russia) has over 4,000 employees and distributes the PepsiCo
brands throughout Russia. Since February 2002, the distribution
network has been greatly enlarged, especially by using the PBG
retail space and coolers in the retail outlets, improving brand
availability to the trade, retailers, wholesalers and clubs. The
brand is produced in 250 ml glass, 330 ml cans and 600 ml, 1.25 l
and 2 l plastic bottles.
The value of the distribution alliance for both partners is as
follows.
Irn-Bru:
●

Irn-Bru in Russia has been a part of A. G. Barr’s international
expansion plan.

●

Irn-Bru has provided extra turnover and profit for A. G. Barr.

PBG:

Source: Courtesy of A. G. Barr plc.

●

In many Russian retail stores (with a broader PBG product range)
Irn-Bru has blocked the available shelf-space for Pepsi’s main
competitor, Coca-Cola.

●

Irn-Bru has provided extra turnover and profit for PBG.

●

Irn-Bru is now established as one of the leading soft-drink brands
in the country.

Co-branding
The practice of using the
established brand of two
different companies on
the same product with
a common marketing
message.

In these situations partners divide the value chain activities between themselves. For
example, one partner develops and manufactures a product while letting the other partner
market it. Forming X coalitions involves identifying the value chain activities where the
firm is well positioned and has its core competence. Take the case where A has its core
competences in upstream functions, but is weak in downstream functions. A wants to enter
a foreign market, but lacks local market knowledge and does not know how to get access
to foreign distribution channels for its products. Therefore A seeks and finds a partner, B,
which has its core competences in the downstream functions, but is weak in the upstream
functions. In this way A and B can form a coalition where B can help A with distribution
and selling in a foreign market, and A can help B with R&D or production. Such kind of
cooperation can generally take place both in the physical world and also in B2B e-markets,
where marketers must constantly monitor whether their (internal) resources and capabilities are providing benefits that fit the changing (external) needs of industry participants
(Johnson, 2013).
In summary, X coalitions imply that the partners have asymmetric competences in the
value chain activities: where one is strong the other is weak and vice versa. In Y coalitions,
on the other hand, partners tend to be more similar in the strengths and weaknesses of their
value chain activities.

Co-branding
The term co-branding is relatively new to the business vocabulary and is used to encompass
a wide range of marketing activity involving the use of two or more brands. This so-called

CHAPTER 6 Analysing relationships in the value chain

221

co-branding is closely connected to the downstream-based collaboration. Co-branding could
be considered to include:
●
●

●
●
●

Sponsorship: where Marlboro sponsors the Ferrari team in Formula 1;
Licensing: where Mattel has been granted the worldwide rights to manufacture a Ferraribranded range of boys’ and girls’ toys including vehicles, dolls, soft toys, games and puzzles.
Licensed products, especially with entertainment properties, can sometimes have a limited
shelf-life. Using a licence such as Hello Kitty could be very short term. Others, such as
Disney’s Mickey Mouse, could go on practically for ever;
Retailing: where BP hosts Safeway mini-stores;
Retail co-promotion: where McDonald’s and Disney get together;
Manufacturing collaborations: for example, the Mercedes-Swatch car.

Motives for co-branding
The basis for any cooperative arrangement is the expectation of synergies, which create value
for both participants over and above the value they would expect to generate on their own.
Co-branding is a form of cooperation between two or more brands with significant customer
recognition, in which all the participants’ brand names are retained. It is of medium- to longterm duration and its net value creation potential is normally too small to justify setting up a
new brand and/or legal joint venture. (The Mercedes-Swatch car is an exception here.)
Logic and experience confirm that the stronger the brands that form the co-brand, the
more likely it is that their identities will be preserved, whatever the extent of cooperation.
If the participants were to destroy significant value by abandoning very powerful brands
and investing resources in another name instead, the net value creation potential would be
severely reduced.

Duration
How long cooperative relationships last depends very much on the life cycle of the products
and/or the characteristics of the markets involved.
The relationship between McDonald’s and Disney, where McDonald’s uses the latest Disney
movie on its product range, will typically last for three to four months and can best be defined
as a co-promotion.
At the other extreme, Mercedes-Benz and Swatch are cooperating on the development,
manufacture and launch of a new urban vehicle – a process likely to take five years. This cooperation is taking place in a joint venture.
Similarly, a number of airlines are cooperating on routes, flights and customer marketing in
major global initiatives, such as the Star Alliance. These initiatives have no evident end-point
at all, have new brand identities created for them and are generally described as alliances.
In between these extremes lie a number of arrangements usually referred to as co-branding
and/or ingredient branding, such as Intel with a variety of PC manufacturers to co-brand its
machines with the ‘Intel inside’ logo. But these arrangements are also without fixed end-points.
It appears that the envisioned duration strongly influences the categorisation of many
instances of co-branding, but it is not the only discriminating factor. Longer-term cooperations generally imply more extensive sharing of assets and expertise, with the potential to
generate more shared value.

Values endorsement co-branding
This level of cooperation is specifically designed to include endorsement of one or other’s
brand values and positioning, or both. In fact, it is often the principal reason for the tie-up.
In recent years many charities have launched co-branded ‘affinity’ credit cards with a bank
or credit card company – in fact, so many that the concept has been somewhat devalued, but
the principle remains intact. This is a win–win situation for the bank, the charity and the
customer. The charity benefits from extra revenue, the bank gets extra transaction volume

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Part II Assessing the external marketing situation

along with the kudos of charitable associations and the customer feels that they are contributing to a worthwhile cause.
So the essence of value endorsement co-branding is that the two participants cooperate
because they have, or want to achieve, alignment of their brand values in the customer’s mind.
This substantially decreases the pool of potential partners for any projected co-branding deal
and increases the value creation potential.
Le Cordon Bleu’s co-branding deal with Tefal offers a more conventional example of value
endorsement co-branding. Le Cordon Bleu is a French culinary academy whose brand has
become synonymous with the highest standards of cooking. Tefal, a leading French cookware
manufacturer, was launching its new Integral range of high-quality cookware and negotiated
for the endorsement of Le Cordon Bleu in its marketing campaign.
This helped to build brand awareness for Tefal Integral, and it endowed the Integral brand
with strong associations of culinary quality, particularly as Le Cordon Bleu academy’s chefs were
shown to be using Integral cookware and endorsing its quality values. The chief executive officer of
Le Cordon Bleu knowingly staked his brand’s values and reputation on the co-branded products.
Both companies were able to reinforce their complementary brand reputations through
the tie-up and stimulate increased sales revenues for the co-branded products. This highlights
the importance of appropriate partner selection.

Ingredient branding
The rationale here is that a brand noted for the market-leading qualities of its product supplies
that product as a component of another branded product. Despite the similarities between
co-branding and ingredient branding, there is also an important difference, as indicated in
Figure 6.15.

Co-branding
In the case of co-branding, two powerful and complementary brands combine to produce
a product that is more than the sum of their parts and relies on each partner committing a
selection of its core skills and competences to that product on an ongoing basis (Erevelles
et al. 2008; Kleinaltenkamp et al. 2012).
Co-branding
Barcardi Rum
Distributor

This was the case some years ago when Bacardi Rum and Coca-Cola marketed a bottle with
the finished mixed drink ‘Rum-and-Coca-Cola’.

Ingredient branding
OEM
Original equipment
manufacturer. In the OEM
contract the customer
is called the OEM or
‘sourcer’, whereas the
parts suppliers are called
manufacturers of OEM
products.

Normally the marketer of the final product (OEM) creates all of the value in the consumer’s
eyes. But in the cases of Intel and NutraSweet, the ingredient supplier is seeking to build value
in its products by branding and promoting the key component of an end product. When
promotion (pull strategy) of the key component brand is initiated by the ingredient supplier,
the goal is to build awareness and preference among consumers for that ingredient brand.
Simultaneously, it may be the manufacturer (OEM) that seeks to benefit from a recognised
ingredient brand. Some computer manufacturers are benefiting from the quality image of
using an Intel chip.
However, ingredient branding is not suitable for every supplier of components. An ingredient supplier should fulfil the following requirements:
●

●

The ingredient supplier should be offering a product that has a substantial advantage over
existing products. DuPont’s Teflon, NutraSweet, Intel chips and the Dolby noise reduction
system are all examples of major technological innovations, the result of large investment
in R&D.
The ingredient should be critical to the success of the final product. NutraSweet is not only
a low-calorie sweetener, but has a taste that is nearly identical to that of sugar.

An important part of the value for IBM, Compaq or any other PC manufacturer of
co-branding with Intel is the reputation that Intel enjoys in the PC marketplace for the manufactured quality and functional performance of its Pentium microprocessors. Quality and
performance are core values for the Intel Pentium brand, and they migrate through to the
PC product.
The categorisation of ingredient branding as a value-added tool is justified because there
is an identifiable physical component – the chip – contained in the product as sold to the
customer. Without it, the value of the product would be greatly diminished.
Cars provide a good illustration of the benefits of ingredient co-branding. They are the
most expensive branded purchases that most consumers ever make, so the manufacturers
want to attach strong emotional and intuitive values to them in addition to their rational
benefits and values. Many of the car companies, particularly the global volume producers,
have found that co-branding deals enable them cost-effectively to reinforce particular brand
images and customise their products. Various premium car manufacturers use Bose audio
products. The use of such a strongly branded item, associated in the consumer’s mind with
high quality, is heavily promoted with the car’s advertising to reaffirm the premium positioning of the vehicle.
In summary, the essence of ingredient co-branding is that a manufacturer (OEM)/ingredient supplier wishing to convey focused messages about the attributes and values of its
product uses and promotes branded components whose own brand image reinforces the
desired attributes and values.
The ingredient supplier benefits by guaranteeing sales volumes at the same time as reinforcing the attributes of its product brand. The manufacturer (OEM) benefits by confirming
the attributes and image of its product while sharing the marketing costs.

6.6

Relationships with competitors
Relationships between competitors (the horizontal network) have not been analysed to
the same extent as vertical relationships. Cooperative relationships in the vertical network
(Figure 2.3) are easier to grasp as they are built on a distribution of activities and resources

224

Part II Assessing the external marketing situation

among players in a supply chain. Horizontal networks, on the other hand, are more informal,
invisible and based more on social exchanges.
When competitors are involved in resource exchange alliances, competition introduces
some problems. The dilemma is that in creating an alliance with a competitor, an organisation
is, in fact, making them more competitive.
For collaboration to succeed, each competitor must contribute something distinctive: basic
research, product development skills, manufacturing capacity, access to distribution. In the
network approach, the market includes both complementarities and substitutes, both cooperating and competing firms. Competitors also strive to develop their nets. Such competitive
activity is a major force for change in the networks. Competitors are predominantly negatively
connected to each other. They might compete for customers, suppliers or other partners.
Competing firms also often have customers, distributors or suppliers in common. Sometimes
this implies a negative connection, but at other times competing firms do not have conflicting
objectives vis-Ă -vis a common counterpart.
Interaction among competitors has been treated traditionally within economic theory, and
has been explained in terms of the structure of an industry within which it operates. It is
further argued that intensity in competition is dependent on the degree of symmetry between
companies, while the degree of concentration determines whether competitors act in collusion or competition with each other.
Variations in patterns of interaction are also viewed via a relational approach to competitive interaction.
Based on the motives for interaction and the intensity of the relationship concerned, five
types of interaction are distinguished: conflict, competition, coexistence, co-opetition and
cooperation (see Figure 6.16).
Conflict between competitors occurs when the strategies they employ are largely directed at
each other with the aim of destruction. The strongest version of conflict requires that an organisation has, as its single overriding objective, the effective destruction of a specific competitor.
In the early 1980s, a number of authors took upon themselves the task of transferring
the principles of war and battle, as codified by generations of military strategists such as
Von Clausewitz, into the business arena. Organisations can seek not only to destroy existing
competitors, but also to prevent the emergence of new ones. Pre-emptive strategies may be
used to render it unlikely that a new competitor survives.
Competition is goal-orientated, directed towards achieving oneâ&#x20AC;&#x2122;s own goals even though
this may have a negative effect on other competitors. Coexistent competition occurs when
actors do not see one another as competitors, and therefore act independently of each other
(Bengtsson et al., 2010).
It may be argued that one single relationship can comprise both cooperation and competition; that two firms can compete and cooperate simultaneously. In any specific relationship,
elements of both cooperation and competition can be found, but one or the other of these
elements can in some cases be tacit. If both the elements of cooperation and competition are
visible, the relationship between the competitors is named co-opetition. For example, two

1 Conflict
2 Competition
3 Coexistence

Increasing cooperation between
firm and competitor

4 Co-opetition
5 Cooperation

Figure 6.16â&#x20AC;&#x201A; Five types of relationship between a firm and its competitor

CHAPTER 6 Analysing relationships in the value chain

225

EXHIBIT 6.5
Value net â&#x20AC;&#x201C; cooperation/coopetition between competitors within each airline
alliance. The three alliances are competing against each other
Star Alliance members

competitors can complement each other by creating new markets, but will compete when it
comes to separating the markets. Hence, organisations may make the same products, but not
compete in the same markets or segments, or may not compete in the same way (Bengtsson
and Kock, 2000). However, the two competitors have to be careful not to be seen to be
engaging in anti-competitive behaviour.

226

Part II Assessing the external marketing situation

Finally, in cooperation the companies involved strive towards the same goals – for example,
by working together on a common technological platform in strategic alliances. The interaction between competitors is variable and can involve both cooperative and competitive
interaction. Individuals moving from one competitor to another provide a potential link and
a powerful means by which cooperation between them can be achieved. Such an individual
brings with him or her the existing relationships from the organisation left behind. These
relationships may reduce with time, but are unlikely to disappear.
The individual provides a potential communication mode. In many industries movement
of employees between competitors is common, and the resultant network of personal relationships is an important input for the implementation of the firm’s marketing strategy.
In summary, if the firm needs resources held by the competitor and does not have a
strong position, cooperation is the best option. The advantage of cooperation is related to
development, but the function of cooperation is the access to resources rather than a driving
force or pressure to develop. Through cooperation a company can gain competence, market
knowledge, reputation and access to other products and other resources of importance for its
business.

6.7

Internal marketing (im) relationships
Parallel to relationships that curb the free market mechanism outside the company, there is an
internal market consisting of groups communicating to other groups within the organisation.
Internal marketing is considered to be the process of creating market conditions within the
organisation to ensure that internal employees’ wants and needs are met. This will be the best
basis for creating a relationship with external players.
Rafiq and Ahmed (2000) have defined internal marketing as:
a planned effort using a marketing-like approach to overcome organizational resistance to change
and to align, motivate and inter-functionally co-ordinate and integrate employees towards
the effective implementation of corporate and functional strategies in order to deliver customer
satisfaction through a process of creating motivated and customer-orientated employees.

Internal marketing emerged from services marketing. Its purpose was to get the front-line
personnel – who have interactive relationships with external customers – to handle the
service encounter better and with more independence. The distinction between internal and
external marketing becomes blurred.
For instance, the motivation of employees via marketing-like activities was implicit in the
early stages of the evolutionary development of IM. Grönroos (1981) and others also recommend the marketing-like approach to improve the inter-functional coordination and hence
customer orientation. Inter-functional coordination and integration are in later stages. In
later stages of the evolutionary development of IM, the central reason for interest in IM was
its contribution to effective implementation of strategy via increased inter-functional coordination and employee motivation.
At the centre of this framework is customer orientation, which is achieved through a
marketing-like approach to the motivation of employees, and inter-functional coordination.
The centrality of customer orientation reflects its importance in the marketing literature and
its central role in achieving customer satisfaction and hence organisational goals.
The objective of internal marketing within RM is to create relationships between management and employees and between functions. The personnel can be viewed as an internal
market, and this market must be reached efficiently in order to prepare the personnel for
external contacts.

CHAPTER 6 Analysing relationships in the value chain

227

Making staff feel more valued motivates them to pull out all the stops and provide a better
service to those outside.
Companies that fully embrace the concept of IM will therefore reflect their commitment
in, for example, values, assumptions, behaviours, dress codes, reward schemes and office
arrangements. In fact, an organisation’s position relating to IM can be aptly communicated by
the whole corporate brand.
Key components of IM include (Strategic Direction, 2009):
●

●

●

●

Intranet
Connects the computers
within a business
together.

6.8

Trust: employees who feel trusted are much more likely to collaborate and share information that will help the organisation satisfy customer demands. Highlighting similarities
rather than differences can help cultivate trust and a community spirit. In contrast, too
great an emphasis on rank or status can destroy any such ambitions.
Empowerment: insightful management encourage employees to use discretion when dealing with the customer. Being allowed this flexibility on how to perform duties improves
employee self-worth and helps nurture a ‘can do’ attitude that makes for greater adaptability and responsiveness. While potential issues lurk in the shape of overconfidence and role
ambiguity, finding an optimal level of empowerment should prevent any serious problems.
Likewise, clarifying performance expectations can avert confusion by helping employees
strike the right balance between individuality and teamwork.
Behaviour-based evaluation: the norm for many organisations is to use measurable outputs
such as sales figures to gauge success. However, a focus on competences that include communication, personal qualities and service-related behaviours such as problem solving is
deemed a more appropriate assessment of customer service encounters. That way, it is easier to identify where additional or enhanced employee input can improve the customer’s
experience.
Recognition and appreciation: reward schemes provide a powerful means of encouraging
enforcement and continuity. While the type of programme should be appropriate to organisational culture, it is worth remembering that a simple ‘thank you’ or ‘well done’ can
also do wonders for morale.

An IM organisation can expect to reap rewards in the shape of customer loyalty, positive
word-of-mouth (WOM), increased customer spending and cross-buying behaviour. But the
benefits do not come cheap because the initiative demands significant capital investment in
human resource capabilities.
To a large extent, internal marketing must be interactive. An intranet can help, but the
social event is also important. At the start of a sales season, large groups gather to learn, to be
entertained and to mix socially for a day or two.
Training and education can be seen as tools for internal marketing. Disney has its own
university, and McDonald’s has its Hamburger University.
Internal marketing can be based on personal and interactive relationships as well as on a
certain amount of mass marketing. Traditional activities to reach employees have often been
routinely performed and have built more on bureaucratic principles and wishful thinking
than on professional marketing and communications know-how (Mahnert and Torres, 2007).

Summary
Relationships, rather than simple transactions, provide the central focus in marketing. It is
not enough to discuss the activities that a single firm performs. RM includes relationships
or networks among companies and their suppliers, lateral partnerships among competitors, government and not-for-profit organisations, internal partnerships with business units,
employees and functional departments, and buyer partnerships with intermediate and ultimate customers.

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Part II Assessing the external marketing situation

Competitive advantage stems from the many discrete activities a firm performs in
designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation. The
value chain disaggregates a firm into its strategically relevant activities in order to understand
the behaviour of costs and the existing and potential sources of differentiation. A firm gains
competitive advantage by performing these strategically important activities more cheaply or
better than its competitors.
The focus in the value net is managing relationships – similar to the systems idea of positive synergistic effects created through linkages – rather than optimising individual components of the system. The systems approach focuses not only on the components (e.g. functions
or activities), but also on how they are related.
In this chapter, we have limited our understanding and analysis to how the activities are
linked to the activities of a company’s customers, suppliers, competitors, complementors and
employees (the value net). Furthermore, the company has to have good relations (internally)
and communication with its employees (internal marketing).
According to the value net, a company’s activities evolve within its relationships with these
organisations.

Relationship with customers
The always-a-share customer and the lost-for-good customer represent opposite ends of a
continuum of exchange situations. The always-a-share customer displays less loyalty to a
particular supplier, whereas the lost-for-good customer remains loyal to a particular supplier
for a long time.

Relationship with suppliers
The adversarial approach is derived from a transaction-based theory as it explains how
firms try to minimise the total production costs by maintaining multiple sources in order to
reduce the power of their suppliers with the cooperative relationships. On the other hand, the
company develops a close relationship with a small number of selected suppliers.

Relationship with competitors
Four different types of relationship have been identified, taking the trade-off between cooperation and competition into account: competition, coexistence, co-opetition and cooperation.

Relationship with complementors
These are based on collaboration between manufacturers of complementary functions and/
or products.

Relationship with internal employees
The employees can be viewed as an internal market. Internal marketing is considered to be
the process of creating market conditions within the organisation to ensure that the internal
employees’ wants and needs are met. This will be the best basis for creating relationships with
external organisations.
The development of a customer relationship can be explained by use of the marriage
metaphor: awareness, exploration, expansion, commitment and termination (dissolution).
The decision to terminate is considered to be due to the interaction of a trigger event and
the existing state of the relationship. The factors that characterise an inter-firm relationship cannot only provide a cause for the termination, but impact greatly on the strategies
firms utilise when ending a relationship. A model of inter-firm relationship termination was
proposed, and propositions regarding choice and use of relationship termination strategies
were explored.

Case stUDY 6.1
ARM: challenging Intel in the world market
of computer chips

ARM limited (www.arm.com) is the leading provider of
embedded microprocessor architecture with commanding
market share in everything from mobile devices to sensors.
ARM provides leading microprocessor intellectual property (IP) and supporting technology including physical IP,
system IP, graphic processors, design tools and software to
a massive ecosystem of partners that in turn develop and
support a broad range of industrial and consumer products. ARM licenses and sells its technology and products to
international electronics companies, which in turn manufacture, market and sell microprocessors, application-specific
integrated circuits (ASICs) and application-specific standard
processors (ASSPs) based on ARM’s technology to systems
companies for incorporation into a wide variety of end products. The company primarily operates in the uk, the uS,
europe, South-east Asia and India. It is headquartered in
Cambridge, in the uk.
ARM was established in 1990 as a result of collaboration between Acorn and Apple Computer, to develop a
commercial reduced instruction set computing (RISC) processor. VlSI Technology soon became an investor in ARM. In
1991, the company introduced its first embeddable RISC
core, the ARM6 solution.
Cirrus logic and Texas Instruments licensed ARM technology and nippon Investment and Finance became ARM’s
fourth investor and introduced the ARM7 core in 1993.
In 1994, the company experienced international expansion, when Samsung and AkM (Asahi kasei Microsystems)
licensed its technology. In the same year, it opened offices
in the uS (los Gatos, California) and Japan (Tokyo), also

introducing the ARM7500 ‘system chip’ for multimedia
applications
In 2013 ARM had 28 offices around the world, including
design centres in China, Taiwan, France, India, Sweden and
the uS.

What is a microprocessor (‘chip’)?
Microprocessors are found at the heart of many electronic
systems. They are semiconductor devices capable of interacting with other components of the system, such as memory,
disk drives, keyboards, and so on, either directly or via intermediate devices (‘chip sets’). The processor coordinates the
functioning of these devices and manipulates digital data.
Typically, the processor performs various procedures
on data stored in the memory or received from peripheral devices, and transfers the results to the appropriate
locations. For example, a processor can compress a file by
copying data from RAM, carrying out a compression algorithm and then copying the resulting data to a disk drive.
In order to provide this level of ‘intelligence’, a processor executes programs ultimately written by a human
programmer. A processor of a given design has a specific
instruction set. this is a set of the very logical, arithmetical and
other operations that the device can perform in a single step.
In order to execute the program, the processor steps
through the sequence of instructions at a rate determined
by its clock. This is a device that provides a steady stream
of timing pulses at a rate of anywhere between one million
and several billion per second.
The power consumption of a processor depends on its
clock speed, its power supply voltage and the number of
transistors it contains. Because RISC architectures (which
ARM uses) can be implemented in silicon with far fewer
transistors than CISC architectures (which Intel uses), they
tend to consume far less power in operation.

Low-power processors are ideal for small,
battery-operated products
For products such as desktop computers, which are physically large and mains-operated, the power consumption
of processors is not a very important design consideration.

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Part II Assessing the external marketing situation

Thus CISC processors remain dominant in the desktop PC
market, even though their very fast clock speeds and very
high transistor counts lead to high power consumption and
the need for large heat sinks to ensure that excess heat is
safely dissipated.
For products which must be physically small and batteryoperated, processor power consumption is a critically
important design factor. A key factor in ARM’s success was
the recognition by the company and its customers that its
RISC processor designs offered significant computational
capabilities with low electrical power consumption.
The key to ARM’s business model is that it offers its
manufacturing customers access to its designs, rather than
making silicon chips itself, which is Intel’s business model.
When producing a processor chip, the design phase can be
separated from the physical fabrication phase. Design can
be completed largely with software, and therefore needs
little capital expenditure compared with establishing a fabrication facility. A company like Intel would invest approximately US$ 1 billion in setting up a new production facility.
The high up-front outlay and running costs associated
with advanced semiconductor manufacturing translate into
high entry barriers to this industry. This means that it is difficult to challenge Intel, which is vertically integrated from
initial concept, through design, to production (see Figure 1).

Therefore, ARM uses a different model. It confines itself
to designing RISC processor cores. It then offers this intellectual property to its chip manufacturer customers. Revenues are generated from (see Figure 1):
●

●

Licence fees. The fee is charged in exchange for giving the
customer access to ARM’s design. Licence fees are set at
a level designed to recover ARM’s development costs.
Having paid the fee, each customer then integrates
ARM’s IP into its own chip design, a process that typically takes three to four years.
Royalties. For each chip incorporating ARM’s IP that is
shipped, the manufacturer pays a small royalty. The size
of the royalty is scaled to the price of the physical processor chip. It is typically less than $1 per chip, but the
high volume at which chips are manufactured and the
possibility that a design can be in production for
20 years mean that this is a significant revenue stream.

For the last 30 years or so, the processor industry has been
dominated by the race to create even more powerful chips
for servers and PCs. Intel is the undisputed leader in this
market, having innovated aggressively over the years while
simultaneously bringing down the prices. Processors can now
be found in a massive array of applications and products, and
the number of processors per product has also increased.

Source: Based on financial reports 2011 from (www.arm.com) and Intel
(www.intel.com).

The difference between the two companies regarding
size, turnover and profits is shown in Table 1.
Of the net revenues in 2011, 39 per cent came from
licensing agreements and 51 per cent came from royalties.
In the world of computer chips, there are essentially two
competing architectures: Intel x86 chips and their compatibles, which dominate the PC marketplace; and ARM RISC
chips and their compatibles, which dominate the smaller
but fast-growing mobile devices sector. What makes this
interesting is that Intel and ARM do not simply compete
on price and technical specifications, they also compete
on business model, application models and perception and
relationships with the industry.
In addition to both companies serving different types of
products and needs, they also operate vastly different business models. Intel designs, manufactures and sells chips
directly to the marketer of the product, one step before the
final consumer. The benefit of this is that, should there be a
problem with a processor, the company can quickly respond
and fix its supply chain, from design to production. Intel is
famously known to be incredibly good at doing this, with
a quick turnaround of its designed chips to the end user.
However the problem with this structure is that the original
equipment manufacturers (OEMs) cannot customise the
chips for their own purposes, unlike ARM chips.
ARM simply designs its chips and then sells the design to
the manufacturer for licence and royalty fees. This means
that ARM can generate large revenues without having to
make huge capital investments, and enables manufacturers
to customize their chips to certain specifications.
ARM processor-based chips are extremely powerefficient. Intel chips, on the other hand, are powerful but
consume more power. Both companies are slowly creeping
into each other’s territory. Intel is now putting serious effort
into creating energy-efficient chips for mobile devices,
and ARM is making inroads into Intel’s core business territory by making ARM processors for servers. The reasoning
behind this is that servers that are meant for the internet
only require simple functions and therefore do not need
the heavy processing power of Intel’s x86 infrastructure. This
means that they use less energy and do not require as much
cooling, which means that the servers can be made smaller.

231

Both companies have their own very complex relationships with manufacturers and OEMs. Moreover this is
the biggest strength and the biggest downfall of the noncommoditized portion of the technology industry. Although
building strong relationships with manufacturers and end
users is important, it also creates a brand image that is difficult to change. For Intel, this benefit/curse is having the
reputation of creating the most powerful processors but at
the cost of high-energy usage.
ARM designs technology that ensures energyefficient,
high-performance chips and system designs. A processor
design can take two to three years to develop. In most years,
ARM introduces two to three new processors per year with
a range of capabilities making them suitable for different
end-markets.
The companies that choose ARM’s technology pay an
up-front licence fee to gain access to a design. They incorporate the ARM technology into their chip – a process that
often takes three to four years. When the chip starts to ship,
ARM receives a royalty on every chip that uses the design.
Typically the royalty is based on the price of the chip. ARM
expects to recoup a chip’s development costs from the sale
of the first 10 licenses.
Each ARM processor and physical IP design is suitable
for a wide range of end applications and so can be reused
in different chip families addressing multiple markets. Each
new chip family generates a new stream of royalties. An
ARM design may be used in many different chips and may
ship for over 20 years.
The majority of ARM’s revenues are earned from semiconductor companies based all over the world. These
companies sell their ARM-based chips to OEMs building
consumer electronics, which are also based in all major
economies. The OEMs sell their products to consumers and
enterprises in every country. ARM’s royalty revenues are
derived from the chips in these OEM products, and ARM
therefore benefits from the growth in all economies and
countries around the world.
Demand for consumer products has been growing
rapidly, especially in emerging markets such as Brazil and
China.

Why do semiconductor companies buy
ARM technology instead of developing it
themselves?
It is simply too expensive for the semiconductor companies’ R&D teams to develop the technology themselves.
Each company would need to spend over $100 million
every year to reproduce what ARM does. This represents
more than $20 billion of annual costs for the industry. By
designing once and licensing many times, ARM spreads
the R&D costs over the whole industry, making digital electronics cheaper.

Including tablets, netbooks and laptops.
b
Includes other applications not listed, such as headsets, DVD and game consoles.
Source: Based on information from www.arm.com.
a

Every licence represents the opportunity for a future
royalty stream. In recent years ARM has added between
60 and 90 processor licences per year to its existing base
of licences. In 2011 ARM signed a record 121 processor
licences, taking the licence base to nearly 850 licences.

ARM’s development in the smartphone
industry
ARM’s first mobile phone design win was in a Nokia handset
in the mid-1990s. This was one of the world’s first 2G mobile
phones. The software running on the ARM processor in this
phone managed both the protocol-stack and the user interface. This user interface gradually became more sophisticated and engaging for the phone’s users, changing the
configuration of the phone, running games and managing
contact lists.
In low-cost mobile phones there is one chip per phone.
In the new smartphones there are often many more. The
average number of ARM-based chips in a phone went
up from 1.5 in 2006 to 2.6 in 2011. NVIDIA’s new Tegra 3
system for smartphones and tablets contains five ARM
chips as well as NVIDIA’s own graphic processing unit.
More ARM chips means more royalties. A smartphone can,
in the best case, bring the company eight times as many
royalties as a basic phone, a tablet computer 11 times as
many.

The price of the chip varies a great deal, but if we take
an average price of US$5, the typical royalty per chip will be
2 per cent = 10 cents.

ARM’s market position in 2011
Table 2 shows ARM’s market position in different end-user
market applications. Based on assumptions regarding the
average number of chips per device, the total production
of chips in 2011 went up to 23 billion. The production of
chips based on ARM’s technology is 7.9 billion, which results
in a ‘market share’ for ARM’s technology platform of about
30 per cent.

QUESTIONS
1 Explain the role of ARM as a supplier in the ‘chip’ value
chain.
2 What are the strengths and the weaknesses of ARM’s
business model compared with Intel?
3 In which end-user application market should ARM
strengthen its relationships to potential partners, and
how?
Sources: Based on www.arm.com; www.intel.com; other publicly available
data. ARM is a registered trademark of ARM Limited (or its subsidiaries) in
the EU and/or elsewhere. All rights reserved.

CHAPTER 6 Analysing relationships in the value chain

233

Questions for discussion
1 What are the main differences between B2C and B2B relationships?
2 What might be the advantages and disadvantages of creating relationships with consum-

ers for a manufacturer?

3 Motorola and Hewlett-Packard compete in some markets, are supplier and customer

4
5
6
7
8

respectively for each other in various markets, share suppliers in other markets, often have
the same customers and have relationships in yet other markets. What should be done by
the firms to achieve joint goals, minimise conflicts and protect core assets?
Some consulting companies argue that by properly incorporating suppliers in the product
development process, firms can cut the cost of purchased parts and materials by as much
as 30 per cent. Discuss how a buyer–supplier relationship might create these costs savings.
Discuss the possibilities for a manufacturer who wants to integrate consumers into the
product development process.
Explain how distance in cross-cultural buyer–seller negotiations can be reduced.
Dell has entered into a relationship with IBM’s Global Service Division. Under this agreement, IBM will now provide the service support for Dell’s big customers. Evaluate the
benefits of the relationship to Dell and IBM.
Relationships often involve more than the salesperson and a purchasing agent (‘bow-tie’
model). Often, both a whole selling team and a whole buying team are involved. Describe
the interactions between buyer and seller in the ‘diamond’ model.

Hamburg-based Beiersdorf AG can trace its origins back to a
patent received for medical plasters in 1882 by the pharmacist Paul C. Beiersdorf. The business did not remain focused
on this area alone: the first Labello lip-care stick was sold
almost 100 years ago. In 1911, Nivea Creme (which literally
means ‘snow white’) – the first stable, oil-and-water-based
cream – was created. From early on, the company was
looking abroad. Already by 1913 the company generated
42 per cent of its sales abroad.
The 1990s saw the start of Nivea’s systematic expansion
into an umbrella brand. Today, the process is regarded internationally as a classic example of successful brand development. Brand trust has been extended to a wide range of
products: men’s care, hair care, body care, face care, hand
care, sun protection, bath and shower care, deodorants and
make-up. Thanks to Nivea Sun, Beiersdorf is not just the
European market leader for sun-care products; it was also
the catalyst for the introduction of a sun protection factor
as a new global standard.
For a long time, Beiersdorf was active in four business
areas: cosmetics, toiletries, medicinal and pharmaceutical
products. Since the 1990s, Beiersdorf has focused consistently on the growing market of skin and beauty care – a
strategic decision that has now made Beiersdorf Germany’s
largest cosmetics company.
Today the company’s skin-care products are sold in more
than 100 countries.
Sales of the first full-spectrum range of men-care products for the mass market began in 1993. Today Nivea for
Men also has a strong position on the global market and is
consistently gaining market share.
The global market of cosmetics and toiletries totalled
€200 billion in 2008. In the same year, Beiersdorf had total
sales of nearly €6 billion, and €480 million in net income. The
company had 21,700 employees as of 31 December 2008.

Nivea sun care

Source: Courtesy of Beiersdorf AG.

protection). Nivea Sun provides products that enable
people to be as safe as possible. Nivea Sun also encourages
the use of other forms of protection (e.g. wearing a sun hat
and avoiding midday sun). Protection is the largest segment
in the sun-care market.

2 After-sun
Providing cooling and refreshing effects for the skin after a
whole day in the sun.

3 Self-tan

The Nivea Sun brand portfolio has grown to over 40 products, which can be characterised in four different categories:

In contrast to protection and after-sun, the self-tan category
is concerned mostly with cosmetic appeal. Many adults use
self-tan to have an all-year-round sun-kissed glow.

1 Sun protection

4 Whitening products

It is vital that skin is adequately protected against the sun’s
harmful effects (although no sunscreen can provide total

The popularity of whitening products in Asia is based on
the old Asian belief that ‘white skin conceals facial defects’ –

Part Iii Video case study

Source: Courtesy of Beiersdorf AG.

a philosophy passed on for generations, and it reflects the
traditional criteria for beauty.
The choice of product depends on usage occasion (when) â&#x20AC;&#x201C;
e.g. holiday, outdoor sports, gardening, working. This relates
to the Sun Protection Factor (SPF) required, e.g. the SPF
required for a holiday in Egypt differs greatly to outdoor work
in the UK. This is one of the reasons why Nivea Sun includes a
wide range of sun protection, from SPF 4 to 50+.
Sun protection is the primary benefit, but the preference by which this is delivered will vary by segment, e.g.
convenience is important to men (so they choose spray
applicators). Parents want to provide maximum protection
for children (high SPFs and coloured products are therefore
important).
Women are the main purchasers of sun care for the family.
This is reflected in above-the-line (advertising) communications, generally targeted towards a female audience.
Children are not purchasers of sun care. However, Nivea
Sun recognises it can play an important part in educating
children from a young age to be safer when in the sun.
In Asia, Nivea has considerable success with a combination of sun-care and whitening products in face care. While
there may be a market for bleaching products in these
zones, Nivea sticks to gentle formulas. In 2005, Nivea was
the worldâ&#x20AC;&#x2122;s first brand to introduce whitening products for
men in Thailand.

Introduction to Part III
As mentioned earlier, the structure of this book follows the flow of marketing decision
making. After assessing the competences and the competitiveness of the firm in Part I,
Part II mainly looked at the interplay of the three Cs: the company, the customer and the
competitors.
Marketing strategies focus on ways in which the company can differentiate itself
from its competitors, capitalising on its distinctive strengths to deliver better value to its
customers. Thus, a marketing strategy is the creation of a unique and valuable position,

Part I:
Internal assessment

Part II:
External assessment

Part 3:
7.2

Chapter 7

Abell

Corporate mission
7.3

7.3
Strengths

SW

OT

Weaknesses

Opportunities
Threats

7.4
Corporate objectives

Gap analysis

7.5
Corporate growth strategy

7.6
SBU marketing strategy/
portfolio analysis

Chapter 8:
Segmentation and
positioning

Part IV:
Marketing mix

Part V:
Implementation

The structure of Part III and how it fits in with the rest of the book

Ansoff

PLC
BCG
GE/McKinsey
International
portfolios
Supplier portfolio

Chapter 9:
CSR strategy

244

PART Iii Developing marketing strategies

involving a different set of activities. Development of a marketing strategy requires activities to be chosen that are different from rivalsâ&#x20AC;&#x2122;.
As shown in the diagram above, Part III is concerned with marketing decisions on the
strategic level. The complex process of marketing strategy formulation emerges from the
interplay of different factors. A variety of internal and external information is needed to
formulate a marketing strategy. This internal (Part I) and external (Part II) information is
then assessed in a SWOT analysis that, together with the corporate mission, defines the
corporate objectives, growth strategy and the strategic business unit (SBU) marketing
strategy. Though the SWOT analysis is placed on a higher strategic level in the diagram, it
is important to note that this analytic tool may be used on all strategic levels, including
new product planning (tactical decisions).
Chapter 7 (including a SWOT analysis) will be the basis for the output of the SBU
marketing strategy in Chapter 8 (Segmentation, targeting, positioning and competitive
strategy).
Chapter 9 will discuss how the corporate social responsibility (CSR) strategy can influence the overall marketing strategy.
These three chapters are then the input for developing marketing plans on the tactical
level (Part IV) and action planning level (Part V).

Learning objectives
After studying this chapter you should be able to:
describe the stages in strategic market planning
● understand the nature of corporate strategy and how it is connected to the SBU
marketing strategy
● describe and understand the role of SWOT analysis in strategic marketing
● understand when and how to use different strategic tools in strategic market planning
● describe the two downstream portfolio models: the BCG and GE models
● discuss the advantages and disadvantages of these models
● explain the different levels of international portfolio analysis
● explain the purposes of integrating a supplier portfolio model in a marketing analysis
● understand how a supplier can be involved in product development with the
manufacturer
●

246

PART Iii Developing marketing strategies

7.1

Introduction
A strategic approach to marketing has a number of advantages. First, a strategic emphasis
helps organisations orientate themselves towards key external factors such as consumers
and competition. Instead of just projecting past trends, the goal is to build market-driven
strategies that reflect customer concerns. Strategic plans also tend to anticipate changes in
the environment rather than just react to competition. Another reason strategic marketing is
important is that it forces you to take a long-term view.
The structure of this chapter will follow the phases in the corporate marketing planning
process.

7.2

Corporate mission
A formal organisation exists to serve a purpose. This purpose may take a variety of forms and
may be classified in a number of ways according to the view points of a particular organisation.
A well-defined organisation provides a sense of direction to employees and helps guide
them towards the fulfilment of the firm’s potential. Managers should ask, ‘What is our business?’ and ‘What should it be?’ The idea is to extract a purpose from a consideration of the
firm’s history, resources, distinctive abilities and environmental constraints. A mission statement should specify the business domains in which the organisation plans to operate, or more
broadly – for example, ‘we are an office productivity company’. The firm should try to find a
purpose that fits its present needs and is neither too narrow nor too broad.
Determining a corporate mission that fulfils these requirements is by no means easy. Some
companies spend two or three years redefining their corporate mission and still manage to
produce a corporate mission statement that is not particularly useful or relevant. But what
precisely is the nature of such a statement?
To be useful and relevant, a business definition should ideally fulfil a number of criteria.
The following represents the more important of these criteria when thinking about how to
define a business:
The definition should be neither too broad nor too narrow. Definitions such as ‘we are in
the business of making profits’ or ‘we produce pens’ are not really useful. Effective mission
statements should cover product line definition, market scope and growth direction.
Ideally, the definition should encompass the three dimensions of what Abell (1980) refers to
as the ‘business domain’. These three dimensions are customer groups to be served, customer
needs to be served and technologies to be utilised.

7.3

Swot analysis
SWOT (strengths, weaknesses, opportunities and threats) analysis is a technique designed
especially to help identify suitable marketing strategies for the company to follow.
A SWOT analysis encompasses both the internal and external environments of the firm.
Internally, the framework addresses a firm’s strengths and weaknesses on key dimensions
including: financial performance and resource; human resources; production facilities and
capacity; market share; customer perceptions of product quality, price and product availability;
and organisational communication. The assessment of the external environment includes
information on the market (customers and competition), economic conditions, social trends,
technology and government regulation. When performed correctly, a SWOT analysis can
drive the process of creating a sound marketing plan. SWOT analysis can be especially useful
in discovering strategic advantages that can be exploited in the firm’s marketing strategy.

In this section, we will explore the benefits of a SWOT analysis and discuss guidelines for
conducting a productive one.
The effective use of SWOT analysis provides the following four key benefits to the manager
creating the marketing strategy:
1 Simplicity: SWOT analysis requires no extensive training or technical skills to be used suc-

cessfully. The analyst needs only a comprehensive understanding of the firm and the industry in which it operates. Because specialised training and skills are not necessary, the use of
a SWOT analysis can actually reduce the costs associated with strategic planning.
2 Collaboration: because of its simplicity, SWOT analysis fosters collaboration and open information exchange between the managers of different functional areas. By learning what
their colleagues do, what they know, what they think and how they feel, the marketing
manager can solve problems and fill voids in the analysis before the marketing strategy is
finalised. The SWOT analysis framework provides a process that generates open information exchange in advance of the actual marketing strategy development process.
3 Flexibility: also closely related to its simplicity is the flexibility of SWOT. It can enhance the
quality of an organisation’s strategic planning, even without extensive marketing information systems. However, when comprehensive systems are present, they can be structured to
feed information directly into a SWOT framework. In addition, the presence of a comprehensive marketing information system, even though it is not needed, can make repeated
SWOT analyses run more smoothly and efficiently.
4 Integration: SWOT analysis can also deal with a wide variety of information sources.
SWOT analysis allows the planner to integrate and synthesise diverse information, both of
a quantitative and qualitative nature. It organises information that is widely known, as well
as information that has only recently been acquired or discovered.
SWOT analysis can help push the planning team towards agreement as it uncovers potentially
harmful disagreements. All of these different forms of information are inherent to, and sometimes problematic for, the strategic planning process. SWOT analysis helps transform this
information from a weakness of the planning process into one of its major strengths.

Conditions for an effective and productive SWOT analysis
The degree to which a firm receives the full benefits of a SWOT analysis will depend on the
way the framework is used. If done correctly, SWOT can be a strong catalyst for the planning
process. If done incorrectly, it can be a great waste of time and other valuable resources. To
ensure that you receive the full benefits, you should:
●
●
●
●

stay focused;
collaborate with other functional areas;
research issues from the customer’s perspective;
separate internal issues from external issues.

Stay focused
A major mistake planners often make in conducting a SWOT analysis is to complete only one
generic SWOT analysis for the entire organisation (corporate SWOT).
Instead you have to decide which organisational level is being analysed and then start the
SWOT analysis there. However, as shown in Figure 7.1, SWOT analyses at the different levels
are interlinked.
So when we say SWOT analysis, we really mean SWOT analyses. In most firms there
should be a series of analyses, each focusing on a specific organisational level and/or a specific
product/market combination. Such a focus enables the marketing manager to concentrate on
the specific marketing mix being used in a given market. This focus also allows the manager
to analyse the specific issues that are relevant to the particular product/market. If needed,

248

PART Iii Developing marketing strategies

ORGANISATIONAL
LEVEL
Corporate
Strengths

Opportunities

Weaknesses

Threats

SBU 1

Corporate
level

SBU 2
etc.

Strengths

Opportunities

Strengths

Opportunities

Weaknesses

Threats

Weaknesses

Threats

Product 1

Product 2

Strengths

Opportunities

Strengths

Opportunities

Weaknesses

Threats

Weaknesses

Threats

Market 1

SBU
level

Product
level

Market 2

Strengths

Opportunities

Strengths

Opportunities

Weaknesses

Threats

Weaknesses

Threats

Market
level

Figure 7.1â&#x20AC;&#x201A; The link between SWOT analyses and different organisational levels

separate product/market analyses can be combined to examine the issues that are relevant
for the entire strategic business unit, and business unit analyses can be combined to create a
complete SWOT for the entire organisation. The only time a single SWOT would be appropriate is when an organisation has only one product/market combination.
Besides increased relevance, another major benefit of a focused SWOT analysis is its ability
to identify knowledge gaps. The identification of such gaps depends on the firmâ&#x20AC;&#x2122;s ability to
gather market intelligence.
The requirement of staying focused is also true when we talk about competitors. Information
on competitors and their activities is an important aspect of a well-focused SWOT analysis. The
key is not to overlook any competitor, whether a current rival or one that is not yet a competitor.
As we discussed in Chapter 5, the firm will focus most of its efforts on brand competition. As the
SWOT analysis is conducted, the firm must watch for any current or potential direct substitutes
for its products. Product and total budget competitors are important as well. Looking at all types

of competition is important because many planners never look past brand competitors. Thus,
although the SWOT analysis should be focused, it must not be myopic. Even industry giants can
lose sight of their potential competitors by focusing exclusively on brand competition. Kodak,
for example, had always taken steps to maintain its market dominance over rivals such as Fuji,
Konica and Polaroid in the film industry. However, entering the market for digital cameras
completely changed Kodak’s set of competing firms. Kodak was forced to turn its attention to
giants such as Sony and Canon in the fast-growing market for digital cameras.

Collaborate with other functional areas

Cross-selling
Selling an additional
product or service to an
existing customer.

The SWOT analysis should be a powerful stimulus for communication outside normal channels. The final outcome of a properly conducted SWOT analysis should be an amalgamation of information from many areas. Managers in product development, production finance,
inventory control, quality control, sales, advertising, customer service and other areas should
learn what other managers see as the firm’s strengths, weaknesses, opportunities and threats.
This allows the marketing planner to come to terms with multiple perspectives before actually
creating the marketing strategy and the marketing plan.
As the SWOT analyses from individual areas are combined, the marketing manager can identify opportunities for joint projects and cross-selling of the firm’s products. In a large organisation, the first time a SWOT analysis is undertaken is the first time that managers from some areas
have formally communicated with each other. Such cross-collaborations can generate a very
good environment for creativity and innovation. Moreover, research has shown that the success
of introducing a new product, especially a radically new product, is extremely dependent on the
ability of different functional areas to collaborate and integrate their differing perspectives. This
collaboration must occur across divisions and between different organisational levels.

Research issues from the customer’s perspective
Every issue in a SWOT analysis must be examined from the customer’s perspective. To do
this, the analyst must constantly ask questions such as:
What do our customers (and non-customers) believe about us as a company?
What do our customers (and non-customers) think of our product quality, customer service,
price and overall value and promotional messages in comparison to our competitors?
● What is the relative importance of these issues, not as we see them, but as our customers
see them?
●
●

Examining every issue from the customer’s perspective also includes the firm’s internal
customers: its employees. Some employees, especially front-line employees, are closer to the
customer and can offer a different perspective on what customers think and believe. Other
types of stakeholders, such as investors who are involved in providing capital for the firm,
should also be considered. The SWOT analysis forces managers to change their perceptions
to the way customers and other important groups see things. The contrast between these two
perspectives often leads to the identification of a gap between management’s version of reality
and customers’ perception. It is like putting a mirror in front of the manager and saying: ‘This
is how customers look at you – is this also how you see yourself?’

Separate internal issues from external issues
As you conduct a SWOT analysis, it is important to keep the internal issues separate from the
external ones. Internal issues are the firm’s strengths and weaknesses, while external issues
refer to opportunities and threats in the firm’s external environments.
The failure to understand the difference between internal and external issues is one of the
major reasons for a poorly conducted SWOT analysis. This happens because managers tend to
get ahead of themselves by listing their existing marketing strategies and tactics as opportunities.
Opportunities and threats exist independently of the firm. Strategies and tactics are what the firm
intends to do about its opportunities and threats relative to its own strengths and weaknesses.

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PART Iii Developing marketing strategies

SWOT-driven strategic marketing planning
In the previous section we looked at the conditions for conducting an effective SWOT analysis.
Now, we will consider how a firm can use its set of strengths, weaknesses, opportunities and
threats to drive the development of strategic plans that will allow the firm to change its current
marketing strategy and achieve its goals and objectives. Remember that a SWOT analysis should
not be an academic exercise to classify information correctly. Rather, it should serve as a catalyst to facilitate and guide the creation of marketing strategies that will produce the desired
results. The process of organising information within the SWOT analysis can help the firm see
the difference between where it thinks it is, where others see it as being and where it hopes to be.
To address these issues properly, the marketing manager should appraise every strength,
weakness, opportunity and threat to determine its total impact on the firm’s marketing efforts.
This assessment will also give the manager an idea of the basic strategic options that might be
available to emphasise the firm’s capabilities or convert/minimise its weaknesses and threats.
One method of conducting this SWOT assessment is to create and analyse the SWOT matrix.
Let’s look at how a marketing manager might conduct this assessment.
There are two main steps in a SWOT analysis. In Figure 7.2 (compare with Figure 2.3) the
process and assessment of the firm’s SWOT starts with looking at the resources (‘roots’) of the
company (Agarwal et al., 2012). The manager should also assess the firm’s business processes,
which are key to meeting customers’ problems rather than specific products. The question is
how can the company change the resources and create competitive advantages (at the top of
Figure 7.2) by investing in key success resource areas (at the bottom of Figure 7.2)?

Step 1: Converting weaknesses and threats

Repositioning
A product strategy
that involves changing
the product design,
formulation, brand image
or brand name so as
to alter the product’s
competitive position.

Firms can convert weaknesses into strengths, and even capabilities, by investing strategically
in key areas (e.g. R&D, customer support, promotion, employee training) and by linking key
areas more effectively (such as linking human resources to marketing). Likewise, threats can
often be converted into opportunities if the right resources are available. Finding new markets
for a firm’s products could be a viable conversion strategy.
In some cases, weaknesses and threats cannot be successfully converted in the short or long
term. When this occurs, the firm must adopt strategies that avoid these issues or minimise
their repercussions. One such strategy is to become a niche marketer. Another strategy for
minimising or avoiding weaknesses and threats is to reposition the product. Changes in
demographics, declining sales or increasing competition are common reasons for product
repositioning. Despite a company’s best efforts, some weaknesses and threats simply cannot
be minimised or avoided. When this situation occurs, the firm is said to have a limitation.
Limitations occur most often when the firm possesses a weakness or faces a threat that coincides with one of its opportunities. Limitations can be particularly troublesome if they are
obvious to consumers. How does a company deal with its limitations? One way is to diversify,
thus reducing the risk of operating solely within a single business unit or market.
The manager has several potential marketing activities that can be used to take advantage
of capabilities and convert weaknesses and threats. At this stage, however, there are likely to
be many potential directions for the manager to pursue. Because most firms have limited
resources, it is difficult to accomplish everything at once. The manager must prioritise all
potential marketing activities and develop specific goals and objectives for the marketing plan.

Step 2: The matching of strengths and opportunities
The key to the successful achievement of the firm’s goals and objectives depends on the ability
of the firm to transform key strengths into capabilities by matching them with opportunities in the marketing environment. Capabilities can become competitive advantages if they
provide better value to customers than competitors’ offerings.
When we refer to capabilities or competitive advantage, we usually speak in terms of real
differences between competing firms. After all, capabilities and competitive advantage stem

from real strengths possessed by the firm. However, the capabilities and competitive advantage
that any firm possesses are often based more on perception than reality. Most customers make
purchase decisions based on their own perceptions of the firm’s capabilities and advantages.
How customers see a company is how that firm is. Regardless of the facts about a company,
if customers perceive the company as slow to react, impersonal, or having excessively highpriced or out-of-date products, that is quite simply the way that firm is.
Effectively managing customers’ perceptions has been a challenge for marketers for generations. The problem lies in developing and maintaining capabilities and competitive advantage that
customers can easily understand, and that solve specific customers’ needs. Capabilities or competitive advantages that do not translate into specific benefits for customers are of little use to a firm.
Successful firms attempt to get very close to their customers by seeking their input on how
to make the firm’s goods and services better, or how to solve specific customer problems. These
firms also attempt to create long-term relationships between themselves and their customers.
As outlined in Chapter 3, a firm must possess certain core competences to be able to implement a market strategy of competitive excellence. Before a competitive advantage can be
translated into specific customer benefits, the firm’s target market(s) must recognise that its
competences give it an advantage over the competition.

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PART Iii Developing marketing strategies

7.4

Corporate objectives
Broadly speaking, setting objectives involves a company considering the following two
questions:
1 Where do we wish to go?
2 When do we intend to arrive?

Without an answer to these questions, a company can be likened to a ship without a compass;
it can move, but it lacks a clear sense of direction. More specifically, corporate objectives:
provide for a sense of purpose in a company; without objectives, companies lack the means
to focus and organise their efforts;
● help a company to achieve consistency between the various levels of decision making, and
between the different functions;
● help to stimulate effort; they provide a basis for motivating individuals to achieve them;
● provide the basis for control in a company; unless we know precisely what is required, it is
difficult, if not impossible, to know the extent to which we have achieved it.
●

In order to fulfil these important functions, objectives must have certain characteristics.
Objectives should be:
Quantified: quantitative objectives with respect to levels of both performance and time
reduce the risk of their being vague or ambiguous.
● Acceptable and agreeable: to those charged with the responsibility of attaining them. It is
pointless setting objectives if they are not acted upon – or if the effort to achieve them is
given grudgingly. A frequent reason for objectives being unacceptable is that they are felt
to be too difficult or impossible to achieve.
● Consistent: as we shall see shortly, companies often have a variety of objectives, as opposed
to a single one. It is important that these multiple objectives do not conflict one with another in such a way that the achievement of an objective in one area is inconsistent with
the achievement of objectives in others. For example, an objective of improved profitability
may be inconsistent with an objective of maximum sales.
●

Gap analysis
A technique that
compares future likely
company performance
against desired
performance outcomes
in order to identify any
gaps.

Having discussed the functions of objectives, and the characteristics that objectives ideally
should possess if they are to serve these functions, we can now turn our attention to the
variety of corporate objectives that a company might set.
In economic analysis it is often asserted that a firm has one, and only one, objective:
namely, to maximise its total profits. In addition to profit objectives, it is now recognised that
companies may have a variety of objectives encompassing a spread of activities. Some of the
most frequently encountered objectives and their corresponding performance criteria/measures are shown in Table 7.1.
Whatever the mix of objectives, it must be remembered that the objectives themselves
relate to some point in the future – hence the importance of specifying a timescale for
their achievement. For an existing business there will also be a past. It is possible, therefore, to measure the past and current performance of the company with respect to those
areas in which it has objectives for the future. Management can then compare where it
wishes to be (objectives) with where it is likely to be on the basis of a projection from
past performance. Any difference constitutes what is referred to as a planning gap, which
would cause some kind of gap analysis. This notion of a planning gap is illustrated in
Figure 7.3.
The gap stems from the difference between future desired profit objectives and a forecast of
projected profit based on past performance and following existing strategy.
If there is a planning gap, a number of options are available; the intention, however, is to
close the gap. For example, the gap could be closed by revising objectives downwards. Such a

step might be taken where the initial objectives are unrealistic. Alternatively, or in addition,
the gap could be closed by actions designed to move the company off the projected curve and
towards the desired curve.
The next step in the process of corporate planning is the formulation of strategies.

7.5

Corporate growth strategy

Market penetration
A strategy for company
growth by increasing
sales of current products
to current market
segments without
changing the product.
Market development
A strategy by which an
organisation attempts
to draw new customers
to an existing product,
most commonly by
introducing the product
in a new geographical
area.

A strategy for reaching long-term objectives needs to be developed specifically for each SBU.
Market penetration, product development, market development and diversification are the
four basic product strategies Figure 7.4 for closing the planning gap. Each cell in the Ansoff
matrix presents distinct opportunities, threats, resource requirements, returns and risks, and
will now be discussed.

Market penetration
The most frequently used strategy is to take the existing product in the existing market and try
to obtain an increased share of that market. The two ways in which this can be achieved are by
increasing sales to existing customers and by finding new customers in the same market. The
first strategy means persuading users to use more of the product on more occasions, perhaps
by replacing an indirect competitor. Alternatively, the strategy may be to use the product
more often without any need to take business from competitors.
The second strategy takes business directly from competitors by increasing both penetration and market share. This can be achieved either by changing the product offering or by
changing the positioning of the product offering.

With this option, product improvement is also an option. An example of a company
following such a tactic is Japan-based Komatsu – Caterpillar’s most important competitor
in the market for earthmoving and construction equipment. They have taken a significant
market share by continually raising the quality of their products, which has allowed an
extension of warranties, and by extending the range of their products’ application through
improved technologies. A company may attempt to expand a market that they already serve by
converting non-users to users of their product. This can be an attractive option in new markets,
where non-users form a sizeable segment and may be willing to try the product given suitable inducements. Thus, when Carnation entered the powdered coffee whitening market with
Coffeemate, a key success factor was its ability to persuade hitherto non-users of powdered
whiteners to switch from milk. Former users can also be targeted. Kellogg has targeted former
breakfast cereal users (fathers) who rediscover the pleasure of eating cornflakes when feeding
their children. Market expansion can also be achieved by increasing usage. Colman attempted
to increase the use of mustard by showing new combinations of mustard and food. Kellogg
has also tried to increase the usage (eating) rate of its cornflakes by promoting eating them in
the evening as well as at breakfast.

Market development
This entails the marketing of current products to new customer groups and new regions.

New customer groups
The promotion of nylon for new customer groups accounted for the growth in sales of nylon,
which was first marketed as a replacement for silk in parachutes, but expanded into shirts,
carpets, tyres, etc.

Geographic expansion
Geographic expansion is appropriate when important competitors are opening up new
markets, or when opportunities in new markets will be available for only a short time. These
characteristics are often found in high-tech industries such as computer technology and
advanced circuit technology. The speed with which new computer chips, for example, can be
matched by competitors means that they are marketed globally as quickly as possible to take
advantage of product superiority for as long as possible.
Geographic expansion also becomes necessary when intense price competition in slowgrowing markets leads to diminishing profit margins. To achieve higher sales volumes, the
company introduces its products in markets where few product modifications are required.

Product development
This strategy involves a major modification of the goods or service, such as its quality, style,
performance or variety.
A company following its basic strategy of product market development allocates resou­
r­ces to a limited number of markets and focuses its operations on the development of new
products in these areas. This approach is appropriate if the company is well-established in
its markets and lacks the motivation, ability or knowledge to adapt to a new environment.
Product market development is most appropriate when the current product market has
matured and new product markets are growing fast in existing markets.
An offer of ‘high performance’ versions of existing car models can be used to extend the
ranges to additional customers. Similarly, adding vitamins to orange juice will possibly cause
some existing users to increase their usage but may also attract new users.

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PART Iii Developing marketing strategies

Diversification

Vertical integration
Seeking control of
channel members
at different levels
of the channel, e.g.
the manufacturer’s
acquisition of the
distributor (= forward
integration).

7.6

This option concerns the development of new products for new markets. This is the most risky
option, especially when the entry strategy is not based upon the core competences of the business. Firms must beware of adopting diversification simply because the grass looks greener
in the new market.
One obvious example is the tobacco companies that have diversified – often at considerable
cost – into areas as varied as cosmetics and engineering. However, diversification can also be a
positive move to extend the application of existing expertise. Honda’s move from motorcycles
to cars (based on its core competence in engines) and Sony’s move into 8 mm camcorders
(based on its core competences in miniaturisation and video technology) extended the application of existing expertise.
Disney Corporation diversified from cartoons to theme parks and television broadcasting.
Heinz has steadily and successfully extended beyond its core ketchup business; its Weight
Watchers brand is now worth hundreds of millions of dollars. But it should be noted that, like
many other similarly successful diversifications, Heinz’s strategy was built on a logical extension of the company’s existing strengths.
Vertical integration is one way for corporations to diversify their operations. Forward
integration occurs when a firm moves downstream in terms of the product flow – as when a
manufacturer acquires a wholesaler or retail outlet. Backward integration occurs when a firm
moves upstream by acquiring a supplier. For example, Compaq has strengthened its position
in computer software markets by acquiring several software developers.
Concentric diversification occurs when a firm develops internally or acquires another business that does not have products or customers in common with its current business, but
that might contribute to internal synergy through the sharing of production facilities, brand
names, R&D know-how, or marketing and distribution skills. Thus, Sara Lee (maker of bakery
and deli products) has made more than 60 acquisitions in recent years – most involving businesses that could benefit from the firm’s well-respected brand and its distribution strengths
in grocery stores.
Conglomerate diversification, the riskiest diversification of all, moves into completely new
areas. For example, British Aerospace decided to apply the huge cash flow from its defence business to investments in cars, construction and property. The company never found the expected
synergy and either divested the acquisitions or reported large losses (Economist, 1995).
Ansoff ’s product–market matrix is probably one of the best-known frameworks for delineating overall corporate strategies. A second and increasingly popular group of techniques
aimed at the identification and selection of corporate strategies is also based on analysing
appropriate marketing strategies. These are the so-called ‘portfolio models’ and they will be
discussed in the next section.

SBU marketing strategy/portfolio analysis

Portfolio planning
Managing groups of
brands and product lines.

The definition of the unit of analysis for portfolio planning is a critical stage, and one that
is often poorly done in practice. The components of a firm involved in portfolio analysis or
businesses are called strategic business units, or SBUs. Managers within each of these business
units decide which objectives and strategies to pursue. Senior corporate managers typically
reserve the right to grant final approval of such decisions to ensure their overall consistency
with corporate objectives and resource allocations across SBUs in the company portfolio.
Lower-level general managers, however, conduct much of the analysis on which such decisions are based. These managers are more familiar with a given SBU’s products and customers,
and ultimately they are responsible for implementing its strategy.

Ideally, strategic business units have the following characteristics:
homogeneous set of markets to serve with a limited number of related technologies: minimising diversity across an SBU’s product market entries enables the unit’s manager to better
formulate and implement a coherent and internally consistent business strategy;
● unique set of product markets: in the sense that no other SBU within the firm competes for
the same customers with similar products. Thus, the firm avoids duplication of effort and
maximises economies of scale within its SBUs;
● control over those factors necessary for successful performance: production, R&D and
engineering, marketing and distribution, etc. This does not mean an SBU should not share
resources – such as a manufacturing plant or a salesforce – with one or more other business
units. But the SBU should determine how its share of the joint resource is used effectively
to carry out its strategy;
● responsibility for their own profitability.
●

As you might expect, firms do not always meet all of these ideals when creating business units.
There are usually trade-offs between having many small homogeneous SBUs versus large but
fewer SBUs that managers can more easily supervise.
Portfolio analysis was originally intended for use at the SBU level, where these are generally
defined as subsidiaries that can operate independently as businesses in their own right. In reality,
however, boundaries are seldom clear-cut and the problems of definition can be substantial.
Practitioners have often used the portfolio models (e.g. the BCG model) to look at products rather than business units, or to provide a pictorial presentation of international markets.
These applications do not conform strictly to those for which they were originally intended,
but their value as a means of presenting much information still remains, providing the limitations of the matrix are kept in mind.
Where products are selected as the unit of analysis, it is important that market shares and
growth rates reflect the more specific market sectors in which they are operating.

Product life cycle (PLC)

Product portfolio
A collection of products
balanced as a group.
Product portfolio
analysis focuses on
the interrelationships
of products within
a product mix. The
performance of the mix
is emphasised rather
than the performance of
individual products.

In relation to portfolio models, the most important message the PLC can bring to management
is that of cash flow. The model offers a clear reminder that the launch of a new brand requires
significant investment that can last from its launch to the end of the growth phase, which can
be a longer period than most organisations allow for. In addition, the more successful the new
brand, the greater the investment needed.
This proposition suggests that products are born, grow to maturity and then decline, much
like plants and animals. During the introductory period, sales grow rapidly but the high
expenses mean that no profits are made. Near the end of the growth stage, the rate of expansion of sales begins to slow down and profits reach a peak. During the maturity phase, sales
reach their peak and profits are slowly eroded by increasing competition. If nothing is done to
revive declining products, they eventually have to be dropped. However, sometimes it is hard
to know when a product is leaving one stage and entering the next. The life cycle concept helps
managers think about their product line as a portfolio of investments.
Most organisations offer more than one product or service, and many operate in several
markets. The advantage here is that the various products – the product portfolio – can be
managed so that they are not all in the same phase in their life cycles. Having products evenly
spread out across life cycles allows for the most efficient use of both cash and human resources.
Figure 7.5 shows an example of such life cycle management and some of the corresponding
strategies that follow the different stages of the product life cycle.
The current investment in C, which is in the growth phase, is covered by the profits being
generated by the earlier product, B, which is at maturity. This product had earlier been
funded by A, the decline of which is now being balanced by the newer products. An organisation looking for growth can introduce new goods or services that it hopes will be bigger
sellers than those that they succeed. However, if this expansion is undertaken too rapidly,

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PART Iii Developing marketing strategies

Stage of the product life cycle
Growth

Sales (€ / $) or profit

Introduction

Maturity

Decline

Product B
Total company
sales

Product A

Product C

Total company
profit

+
–
Costs

Highest costs per customer

High costs per customer

Low costs per customer

Low costs per customer

Customers

Innovators

Adopters

Majority

Laggards

Competitors

None or few

Few

Maximum number of
competitors

Declining number

Marketing
objectives and
strategy

High product awareness and
trial – need to explain nature
of innovation

Phase out weak items
Trying to create a ‘recycle’ by
launching new features

Price (profit)

Premium price, but probably
making a loss due to high
marketing investments

Price to penetrate market –
price may decline as
competitors enter the market

Price to match or beat
competitors – price under
pressure from distributors

- Price competition and price
cuts may lead to losses

Place

Build exclusive or selective
distribution

Build selective distribution

Build more intensive
distribution

Go selective; phase out
unprofitable outlets

Promotion

Build product awareness
among early adopters and
distributors
Use heavy sales promotion to
entice trial

Build awareness and interest
in the mass market

Stress brand differences and
benefits

Reduce to level needed to
retain hard-core loyals

Alternative if customers are
loyal: reduce to exploit
customers’ high demand

Increase to encourage brand
switching

Alternative: increase in order
to create ‘recycle’

Figure 7.5 Product lifecycle

many of these brands will demand investment at the beginning of their life cycles, and even
the earliest of them will be unlikely to generate profits fast enough to support the numbers
of later launches. Therefore, the producer will have to find another source of funds until the
investments pay off.

7.7

Introduction to portfolio models
Relationship marketing attempts to involve and integrate customers, suppliers and other
partners into the firm’s development of marketing activities.
Portfolio models have their foundation in Markowitz’s (1952) pioneering portfolio theory
for the management of equity investments. Since then, portfolio models have been widely
used in strategic planning, essentially at the SBU level.

The portfolio models discussed in this chapter tend to focus on the downstream relationships to the customers (market). Portfolio models have been used in strategic planning
and marketing, but their application to the field of purchasing has been limited. This seems,
however, to be changing, as procurement management has become more strategic. This is
why the dyadic aspect of interdependence between buyer and suppliers, the upstream aspects
of relationships, are also included in this chapter Figure 7.6.
We will start with the downstream-orientated portfolio models (sections 7.8, 7.9 and 7.10) and
then look at an upstream-orientated portfolio model of supplier relationships in section 7.11.

7.8

The Boston Consulting Group’s growth–share
matrix – the BCG model

Market growth rate
The theory behind the
BCG model assumes
that a higher growth
rate is indicative of
accompanying demands
on investment. Inflation
and/or gross national
product have some
impact on the range and
thus the vertical axis can
be modified to represent
an index where the
dividing horizontal line
between low and high
growth is at, for example,
5 per cent. Industries
expanding faster than
inflation or GNP would
show above the line and
those growing at less
than inflation or GNP
would be classed as low
growth and show below
the line.

One of the first – and best known – of the portfolio models is the growth–share matrix
developed by the Boston Consulting Group in the late 1960s. The Boston Matrix offers a
useful map of an organisation’s product strengths and weaknesses, as well as the likely cash
flows. It was reasoned that one of the main indicators of cash generation was relative market
share, and market growth rate was indicative of cash usage. Figure 7.7 shows the Boston
Matrix. It is well worth remembering that one of the key underlying assumptions of this
matrix is the expectation that the position of products in their markets will change over
time. This assumption is, of course, the incorporation of the product life cycle thinking
discussed earlier.
Figure 7.7 presents an example of the share–growth matrix in which six product lines
(A–F) make up the portfolio. A pink circle represents the current position, and a blue circle
the forecast future position. The area of the circle is proportional to the product’s contribution
to company sales volume.
Figure 7.7 shows also the two factors that underlie the Boston Consulting Group’s approach.
Market share is used because it is an indicator of the product’s ability to generate cash; market
growth is used because it is an indicator of the product’s cash requirements.

Market growth rate
The vertical axis recognises the impact of market growth rate on cash flow. This dimension acts as a proxy, or more easily measured substitute, for the more-difficult-to-assess
product life cycle and reflects the strategies and associated costs typical over the cycle.
At product launch, costs are likely to far outstrip revenues. R&D costs will need to be
recouped, production capacity created and market beachheads established. Typically
during the launch and introductory phases of the life cycle, cash flow will be negative and
hence there will be a need to invest cash generated elsewhere (or borrowed from external
sources) in the venture.

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PART Iii Developing marketing strategies

Star

Question
mark

A

Desired or
expected
position

High
Market growth rate %

B

Present
position

D

Cash
cow

Dog
E

Low

C
F

High

1

Divestment

Low

Relative market share
(share relative to largest competitor)

Figure 7.7â&#x20AC;&#x201A; The BCG model

As the product becomes established in the market, revenues will pick up, but the venture is
likely to remain cash hungry because of the need to make further capital investment.

Relative market shares
Relative market share
Comparing your market
share with that of your
biggest competitor.
Having a relative market
share of >1 means you
are the market leader
tha